‘Tis the season for tax loss selling

John Kilburn, retail analyst with Goepel McDermid, is looking for bargains in the junior resource sector this holiday season. Tax loss selling at this time of year typically creates a seasonal weakness he believes may be compounded by investor uncertainty over the price of gold and the general malaise the junior mining market is currently experiencing.

Kilburn advises investors to exercise caution in the event resource markets do not improve in the new year. “Only those companies with strong financials and/or strong financial backers will stand a chance at bouncing off seasonal lows,” Kilburn writes in a recent report. “Junior exploration companies that have little or no money and poor share structure (too much stock outstanding) could be forced into punitive rollbacks before they can be refinanced.”

Kilburn has selected seven junior companies which he believes could represent potential buying opportunities.

Atna Resources (ATN-T) has slipped to its current low of 50 from a high of $1.08 this past summer. The company is led by a strong technical team focused on volcanogenic massive sulphide exploration. The company had an active summer season with drill programs at the Caribou Dome and Dry Creek projects in Alaska, as well as at the San Antonio project in the Dominican Republic.

Results from the Dry Creek joint venture with Grayd Resource (GYD-V) did not meet Atna’s expectations, prompting the company to drop its option. More drilling is planned for the new year on the San Antonio concession, a 60-40 joint venture option with Energold Mining (EGD-V).

Atna is searching for new exploration projects, having recently acquired an option to earn a 60% interest in the 13-km-long Spider Lake base metal property in western Ontario from Major General Resources (MGJ-V). Grabs samples taken by Major General from showings in the Starhill area yielded values of up to 7.4% zinc, 1.4% lead and 1.54% copper, plus 0.87 gram gold and 101 grams silver. A recently completed induced-polarization survey revealed a 1,200-metre-long chargeability anomaly in the immediate area. Drilling is planned for early 2000.

Atna also holds a 40% interest in the selenium-challenged Wolverine polymetallic deposit in the southeastern Yukon. Wolverine is host to a 6.2-million-tonne resource grading 12.7% zinc, 1.3% copper and 1.6% lead, plus 1.76 grams gold and 371 grams silver per tonne. However, the deposit contains high levels of selenium, a contaminant that has stalled development because of concerns about the marketability of the metal concentrates. Atna and partner Expatriate Resources (EXR-V), which owns the remaining 60% interest, have conducted metallurgical studies that indicate a selenium-free product could be achieved through roasting of the zinc concentrate and partial oxidation of the other concentrates followed by leaching of gold and silver. Additional studies are ongoing.

“The acquisition of a fresh project at some point in the future could spur new speculative interest in Atna,” says Kilburn, adding that the issue “offers excellent value at the 50 level and below.” Atna has 20.2 million shares outstanding and $12 million in working capital.

Kilburn considers Donner Minerals (DML-V) a prime candidate for tax loss selling. The issue hit a high of 64 in 1999 and traded at over $4 in late 1997 on the strength of its South Voisey’s Bay exploration in Labrador. Donner is currently trading at around 12, with 42.6 million shares outstanding and a working capital of $3 million.

Donner continues to hold a large land position in the South Voisey’s Bay area, but exploration plans this past summer were suspended because of native issues. The company also holds a large package of ground in the Lac Rocher area of Quebec, where it can earn a 50% interest in some 250 sq. km of ground from Noranda (NOR-T) and Falconbridge (FL-T).

Nuinsco Resources (NWI-T) caused a stir in late January when it announced that a drill hole on its Lac Rocher property, 100 km northeast of Matagami, had intersected 61.5 metres of disseminated sulphides averaging 1.69% nickel and 0.49% copper. Included in the intersection was a 3.2-metre interval of massive sulphides near the bottom of the hole that graded 10.8% nickel.

Nuinsco was able to raise just under $10 million with First Marathon Securities based on the early results. Subsequent drilling, however, failed to extend the massive sulphide mineralization, intercepting mostly disseminated sulphides. Nuinsco has continued to explore other targets on its 100-sq.-km land package and recently began a drill program.

Meanwhile, Donner has outlined several geophysical targets on its optioned ground and has planned a 2,400-metre drill program for early in the new year. “Further weakness in Donner’s share price would represent a buying opportunity in anticipation of a bounce in the new year as drilling starts,” says Kilburn.

With 17.9 million shares outstanding and about $800,000 in working capital, Hunter-Dickinson-led Farallon Resources (FAN-T) is viewed as a buying opportunity on further weakness below 70. For several years now, the company has been mired in a legal wrangle over its principal project, the Campo Morado massive sulphide project in Mexico’s Guerrero state. Third parties have claimed an interest through lawsuits in British Columbia, Nevada and Mexico. The actions in B.C. and Nevada have been dismissed, and Farallon is waiting for a judgment on the Mexican lawsuit. Kilburn says Farallon management is confident the suit will be dismissed before proceeding to trial.

To date, Farallon has spent $24 million exploring Campo Morado and completed more than 64,000 metres of drilling in 320 holes. A combined resource of 27.7 million tonnes is outlined in four deposits averaging 2.03% zinc, 0.55% lead and 0.69% copper, plus 1.49 grams gold and 87 grams silver. Limited surface work in 1999 uncovered three new massive sulphide showings.

Once the legal issues have been resolved, Farallon plans to resume drilling at Campo Morado, which, according to Kilburn, should spark renewed interest in the stock. Farallon is confident it can expand the current resource estimate to the 40-to-50-million-tonne range by systematic drilling.

At 15, Kilburn likes the look of NDT Ventures (NDE-V), which is part of the Northair group of companies, led by Bruce McLeod and Fred Hewett. The company traded as high as $5.80 in mid-1996 on the heels of the Voisey’s Bay nickel discovery. NDT is searching for early-stage opportunities in South America and recently staked the 36-sq.-km Mazo Cruz gold-silver property in southern Peru. This summer, NDT picked up ground in the Cordon de Esquel region of Argentina’s Chubut province. The Vancouver-based junior has a working capital of $4.7 million and 25.5 million shares outstanding.

Peruvian Gold (PVO-V) is considered to offer reasonable value below the 50 level. The issue reached a high of 75 this summer following the announcement of a high-grade intercept from drilling at the Silvertip joint venture in northern British Columbia. Hole 2 yielded 31.4 metres averaging 8.65% zinc, 5.53% lead and 318 grams silver. The intercept is less than 100 metres from underground workings.

Peruvian is earning a 60% interest in the project from operator Imperial Metals (IPM-T). Silvertip hosts manto-style mineralization, with a resource of 2.6 million tonnes grading 8.8% zinc, 6.4% lead, 325 grams silver and 0.63 gram gold. The joint venture believes the new intercept may be part of a feeder zone. The Silvertip workings are being de-watered to provide access for follow-up drilling.

“Even if the planned drilling program fails to confirm the presence of the new zone of chimney-style mineralization, Peruvian will be left with a strong balance sheet to pursue other projects,” Kilburn says. The company has $10 million in working capital and 15.3 million shares outstanding.

With $11.5 million in working capital and 12.1 million shares outstanding, Valerie Gold (VLG-V) is recommended as a buy, should the issue hit new lows during the holidays. After running up to the $1.10 level in October 1999, Valerie has drifted back to the 70 level on little volume. The company has announced results from a preliminary, 2,500-metre drill program on the SB anomaly at the Santa Barbara property in eastern Ecuador. Eight of the 10 holes encountered broad intervals of low-grade copper-gold mineralization, including 190 metres of 0.95 gram gold and 0.1% copper.

Valerie can earn a half-interest in the property from TVX-Normandy Americas, which is owned 50.1% by TVX Gold (TVX-T) and 49.9% by Australian-listed Normandy Mining (ndy). A follow-up program will involve additional trenching and drilling on the SB anomaly, as well as other targets.

Winspear Resources (WSP-V) has an extensive underground exploration program planned for its 67.76%-owned Snap Lake diamond project on the Camsell Lake property in the Northwest Territories. The remaining interest is held by Aber Resources (ABZ-T), but the partners are in dispute with Winspear, claiming Aber has been diluted to about 16%. The matter is currently before the courts.

Winspear traded up to a high of $5.30 in 1999 and currently sits at about the $2.20 level. Kilburn says the prospects for tax loss selling are somewhat complicated by warrants, which expired on Dec. 22, 1999. There are 5.3 million warrants in total, including 1.7 million exercisable at $2.19 per share, 366,000 at $2.15, and 3.2 million at $2.44.

Much of the work in 2000 will involve driving a decline on the NW dyke beneath Snap Lake in order to collect up to 20,000 tonnes of kimberlite from the downdip extent of the dyke. Of that total, 6,000 tonnes representing three 2,000-tonne bulk samples will be processed on site in a newly acquired dense media separation plant. The objective of the $20-million program is to confirm the quality and size distribution of the diamonds at depth. Surface samples collected from two pits dug 300 metres apart in the subcropping portion of the dyke yielded a 10,708-carat parcel from 5,996 tonnes of kimberlite, for an implied grade of 1.79 carats per tonne. The diamonds were valued at US$104.96 per carat.

Based on microdiamond results from 189 holes drilled into the dyke, MRDI Canada estimates the diamond size to be greater than 1.18 mm. The NW Snap Lake dyke is modelled to contain a total resource of 21.3 million tonnes grading 1.97 carats per tonne at an average thickness of 2.4 metres, equivalent to 41.9 million carats. For the part of the dyke that exceeds 2 metres of thickness, the indicated resource is estimated at 8.3 million tonnes grading 1.97 carats at an average width of 3.1 metres.

A scoping study by MRDI shows economic potential for a combined open-pit/underground mine, with a minimum mine life of 10 years. The study was based on the mining of 8.2 million tonnes of kimberlite with a contained diamond value of US$170 per tonne ($251 per tonne). MRDI assumed a 10% diluted grade of 1.62 carats per tonne.

Capital costs for the combined operation are estimated at US$161 million ($241 million) over the life of the mine, whereas operating costs are pegged at US$47.68 per tonne ($71.52 per tonne). The project carries a 44.1% internal rate-of-return and a payback of 3.6 years.

If Winspear can confirm the grade continuity, Kilburn predicts the company will be well on the way to developing a new diamond mine in the Northwest Territories. Winspear has 45.7 million shares outstanding and $14 million in working capital.