Falco deal with Glencore key to Horne 5 development

Falco Resources’ (TSXV: FPC) Horne 5 project contains 7 million oz. gold. It might contain just as many questions.

Perhaps the biggest one is whether or not Falco will secure a fair operating agreement with Glencore (LON: GLEN), which operates the Horne smelter next-door, and essentially acts as a landlord on Falco’s land package through various property agreements.

Both parties met in July and agreed to continue to share information and start a second phase of geotechnical work that will be conducted by Falco, and include the past-producing Quemont mine workings.

The goal is to assess the risks inherent to the eventual dewatering phase of the Horne 5 project.

Falco plans to complete the second phase of geotechnical work before year-end, and in a recent press release said it is working with “specialized insurance providers” to provide Glencore with a “financial guarantee framework” that would give Glencore compensation if the Horne smelter is damaged during Horne 5 development.

So far no agreement has been reached, and Glencore seems to act like it holds all the cards. Perhaps it does.

“The feasibility calls for rather sizable tonnage to be moved below ground, so you have to blast the rocks. And you have infrastructure above, and what would be the impact on the smelter? That’s the main element putting the brakes on the project, because Glencore doesn’t want to lose its infrastructure investment,” said independent, Quebec-based analyst Eric Lemieux during a recent interview.

“As time goes by, Glencore is in the driver’s seat,” he adds. “The price tag is being negotiated, but it’s probably not going down.”

The absence of an agreement and the delay in construction that it is likely to cause prompted BMO Capital on Sept. 10 to lower its 12-month target price on Falco to 80¢ from $2. It still has an “outperform” rating.

Meanwhile, Haywood Capital Markets has a 12-month target price of 40¢ on the junior, with its risk assessment set at “very high.”

On the bright side, Horne 5 boasts impressive reserve numbers: 80.9 million proven and probable tonnes averaging 1.44 grams gold per tonne, 14.14 grams silver, 0.17% copper and 0.77% zinc for 3.61 million oz. gold, 35.64 million oz. silver, 303.2 million lb. copper and 156 million lb. zinc.

A rendering of Falco Resources’ planned Horne 5 gold mine in Rouyn-Noranda, Quebec. Credit: Falco Resources.

The measured and indicated resource, at a $55-per-tonne net smelter return royalty (NSR) cut-off, totals 91.2 million tonnes averaging 1.55 grams gold, 14.89 grams silver, 0.18% copper and 0.88% zinc for 4.54 million oz. gold, 43.62 oz. silver, 363.4 million lb. copper and 1.76 billion lb. zinc.

All of it sits in a prime mining jurisdiction in the city of Rouyn-Noranda, home to several mines and many experienced miners. In fact, Falco general manager Guy Belleau left Goldcorp’s Éléonore mine in the James Bay lowlands to live in Rouyn-Noranda full-time.

Falco expects to attract many more experienced mining personnel if for no other reason than the ability to return home after work.

The company released a feasibility study in 2017, and continues to tweak some numbers.

The low-grade orebody is vertical and open at depth, some 2,400 metres below surface. The plan is to mine using long-hole stoping due to the high integrity of the rocks, and employ as much automation as possible.

Falco says the mine will be the “most technologically advanced” underground hard rock mine in North America.

Once it reaches commercial production, Horne 5 should run for at least 15 years and produce 340,000 equivalent oz. gold annually at a rate of 16,000 tonnes of ore per day. Falco estimates the average life-of-mine cost per tonne at $41.

The post-tax net present value, using a 5% discount rate, is US$602 million. The internal rate of return is 15.3%, with a payback period of 5.6 years. The all-in sustaining cost is US$517 per oz., which Falco says places Horne 5 in the top 25% of global gold projects.

Initial capital costs tally to just over US$802 million, most of which will need to be raised.

Falco got the ball rolling in February by forward-selling 90% of its silver for $180 million in installments from Osisko Gold Royalties (TSX: OR; NYSE: OR). The first $25 million covered two previous $10-million loans from Osisko (the interest on which was paid by granting Osisko more shares).

The next $20 million will come when Falco receives all the necessary third-party approvals and licences. Another $35 million will show up once Falco gets its mining and environmental permits, and raises $100 million. The final $60 million is slated to arrive once the project is fully financed.

Osisko has an option to kick in another $40 million to boost its silver-streaming percentage to 100%. The company also received $2 million from Falco in the form of a “capital commitment” fee. The junior has about $1.5 million in cash and is expected to complete a financing in the next few months.

Falco is finishing studies to deliver its final environmental impact assessment by year-end and secure admissibility from the Quebec government. As part of this effort, the company is providing baseline data and conducting more sampling.

Is all of this to bring Horne 5 to production, or simply to solicit takeover bids?

“It’s difficult to answer that question,” said Falco president and CEO Luc Lessard after a corporate presentation at the National Club in Toronto in September. “At the end of the day, it’s my job to put the project through the development phases and do the best for shareholders.”

The previous mine workings at Horne and Quemont are full of water that must be removed. This process could begin in mid-2020 and take about two years. Falco will build a water-treatment plant at surface to treat the excess water, which contains copper and zinc.

Lessard noted during his presentation there is also a small amount of arsenic in the water in the former mine workings, but not enough to cause problems.

Falco is the largest landholder in the Rouyn-Noranda camp, with 670 sq. km around the historic Horne mine, which was discovered by E.H. Horne in 1923.

From 1926 through 1976, the Horne mine produced 54 million tonnes averaging 6.1 grams gold per tonne, 13 grams silver and 2.22% copper, for a total of 11.5 million oz. gold and 2.5 billion lb. copper.

The Quemont mine, 600 metres away, yielded another 2 million oz. gold and 400 million lb. copper between 1949 and 1971.

Glencore has a 1–2% NSR on all metals on claims and other interests that were transferred to QMX Gold, which sold the Horne 5 land package to Falco in 2012.

A driller at Falco Resources’ Horne 5 gold property in Quebec. Credit: Falco Resources.

Where historical royalties exist, the combined royalty is capped at 3–4%. In areas where no legacy royalties apply, the royalty is capped at 2%, which would be paid to BaseCore Metals LP, a joint venture between Glencore and the Ontario Teachers’ Pension Plan.

Glencore also has the right of first refusal on any ore or concentrates from the Horne 5 concessions.

Osisko Gold Royalties owns 19.9% of Falco. Other major shareholders include Toqueville Asset Management with 7.8%; Investissement Québec with 4.8%; AgaNola with 1.9% and Caisse de dépôt et placement du Québec, with less than 1%.

Despite doubts about the viability of Horne 5, Lessard says he has the full support of Rouyn-Noranda citizens.

“If I go to Rouyn-Noranda tomorrow morning and talk to everybody at the McDonald’s coffee shop, they will tell me, ‘Luc, it’s no problem at all. This project will go ahead. It’s just a matter of when,’” Lessard explained.

Lemieux agrees.

“There are a lot of ‘ifs,’ but [Falco management] believes it can do it,” Lemieux says.

Falco has 228.2 million common shares outstanding (fully diluted) and trades in a 52-week range of 25¢ to 20¢. The share price at press time was 24¢ for a $50-million market capitalization.