Animas Resources Ltd.
Talent and Luck
Kevin Graham
Dec 11, 2007
I was invited to attend the
first-ever site tour of Animas' Santa Gertrudis gold deposits
and exploration lands. With no obligation, this invitation was
extended with the potential for an independent and objective
review of the project from an investor perspective. No consideration
exchanged hands. None was promised. None was expected. I am not,
at the time of writing, a shareholder of the Company, though
this may soon change.
At noon on December 5th, I
met up with Jeff Phillips (the brains behind the creation of
this Company/project), Greg McKelvey (geologist, President and
CEO), and Marina Trasolini (geologist, Lawrence Roulston's Resource
Opportunities) at the airport in Phoenix. We traveled to Rio
Rico, Arizona (near the Mexican border) for an overview briefing
on the Company that evening. Also attending the briefing were
John Wilson (geologist, VP Exploration), John Reynolds (geologist
and geophysicist, consultant), and Odin (Odie) Christensen (geologist,
advisor).
Next morning (December 6th),
we crossed the border, heading south to Magdalena, where we met
with Bob Moriarty for breakfast, and then on to the property.
Meeting us on site was Alberto Navarro (geologist). The day was
spent touring the property, visiting a number of formerly mined
pits, reviewing geologic maps, and grappling with the scope of
the project. That evening, we returned to the hotel at Magdalena
for dinner and the opportunity for more 'getting to know you'
conversation.
The People
I begin with the people running
the show because I think and feel that this is the most important
consideration in looking at any organization. Frankly speaking,
a company could be sitting on Fort Knox, but if I didn't feel
that the team leading the charge was both competent and trustworthy,
it wouldn't see a penny of my investment dollars.
Jeff Phillips appears to be living out one of the
main themes from Jim Collins' excellent book, Good to Great.
Collins postulated that one of the key foundations for building
a great company is to ensure first that you have the right people
'on the bus' before deciding which direction to drive. Working
with Greg McKelvey, Phillips has created a core team of staff,
consultants, directors, and advisors. I will highlight here only
those whom I have met. Detailed descriptions of others can be
found at:
http://www.animasresources.com/s/Management.asp
and
http://www.animasresources.com/s/AdvisoryBoard.asp
Phillips' background is in
corporate finance, marketing, and communications (including work
with Metallica Resources, Ultra Petroleum, Silver Standard Resources,
Strathmore Uranium, Penaco Energy, Guyana Goldfields, and Boron
Chemicals). Essentially, he's the dealmaker who conceived and
created the Company. He's also one of the Company's largest shareholders.
Greg McKelvey is the President and CEO. McKelvey
brings over 40 years of experience in both exploration (including
discovery) and mining, including postings with Newmont, Homestake,
Kennecott, and as VP Exploration Latin America for Phelps Dodge,
one of the former operators of a major section in the Animas
property. He sees his role as guiding the strategic development
and tactical implementation of exploration efforts. Given the
scope of the project, maintaining focus for the Company will
be a significant factor in determining whether or not that path
leads to success. Both in our discussion in transit (four hours
from Phoenix to Magdalena) and during the formal presentation,
McKelvey stressed the need for what he called a balanced 40/40/20
strategy. This strategy is comprised of three major components:
to rapidly extend known resources (40%), to discover additional
resources along strike and under post mineral cover (40%) and
to develop and test new ideas (20%), including deeper targets.
McKelvey
John Wilson is VP Exploration. Wilson brings more
than 35 years of experience around the world in all of: exploration
(including discovery), resource definition, and mine development.
Wilson led the overview presentation, and provided a clear and
concise understanding of the potential of this project. Not a
desk jockey, he'd be happier if he never left the field.
John Reynolds is a consulting geologist/geophysicist
with more than 35 years of direct related experience. He has
worked around the world, leading successful geophysics programs
for numerous mining companies. This includes working on the current
property for 18 months for Phelps Dodge. His role is that of
counterpart in the field to Wilson, leading efforts to compile
and understand existing data, as well as collecting new data
in the targeting of new resources.
Alberto Navarro is a consulting geologist who has
worked on the property for many years, bringing historical context
to the effort. We did not converse much, as my facility with
the Spanish language is more than 30 years into a stage of rust.
Phillips and McKelvey stressed
their feeling of a need to ensure that Animas has at its disposal
a wealth of expertise and connections in the form of a carefully
selected Advisory Board. This group includes specialists in corporate
finance, business development, mining engineering, geologic exploration,
marketing, and mining law. On this last count, one of these advisors
was a co-writer of current mining laws in Mexico, and has recently
served as an advisor to the government in amendments to these
laws. Clearly, Phillips is doing his best to cover all the important
bases.
Odie Christensen is an active member of the Advisory
Board who, in his own words, plans on becoming even more involved.
Christensen's involvement in this project is better understood
with reference to the Behre Dolbear report, commissioned by another
former operator of the property in 1997. See the link at:
http://www.animasresources.com/i/pdf/BehreDolbearonSGCarlinPotential.pdf [BIG file]
In a nutshell, this report
was tasked with evaluating the potential for the Santa Gertrudis
deposit to contain deep Carlin-type gold mineralization. Carlin-type
mineralization means low-grade, high tonnage, with a host of
associative characteristics, including: structure; alteration;
geophysics; geochemistry; mineralization; and soil geochemistry.
Without going into great detail, their conclusion was that this
potential was very strong. Carlin-type mineralization refers
to Newmont's Carlin Trend in Nevada, advanced in the 1980s by
a team led by none other than Odie Christensen. When he arrived
on the scene, the project had identified some 300,000 ounces
of gold. By the time he left, that figure had been raised to
more than 20 million ounces. As Exploration Manager, he was instrumental
in transforming the Carlin Trend from a single mine into the
largest gold district in the United States. For the skeptics
who might suggest that his presence at Carlin was merely coincidental
with this transformation, his next appointment was as Newmont's
Chief Geologist, Worldwide. An impressive member to have on your
team, I say. To the point in question, I heard Christensen say
on more than one occasion during the site tour that this "sure
looks like a Carlin-type deposit."
Christensen, Wilson,
Phillips, Moriarty, and McKelvey
History of the Property
To call this a 'property' would
be a misnomer. The folks at Animas term it a 'district' and rightly
so. This district is a consolidation of properties formerly controlled
by as many as ten different companies at one time. The largest
of these was formerly under the Phelps Dodge umbrella. The collection
of properties has just been expanded to include in total approximately
630 square kilometers of land, all of which is described as 'prospective'.
There are hundreds of kilometers of roads already built. Bonus:
the road that leads to the property stops at the property. As
a result, the chances for cross-border hanky panky traveling
through the area are slim to nil. Power, water, and workers have
been available in past on this property, and are expected to
pose no great challenges to the project on a go forward basis.
One of 22 previously
mined pits
The total cost of acquisitions
is estimated at about $5 million. To find the district, open
Google Earth. Set the Tools/Options to Universal Transverse Mercator.
Find the coordinates 543000 mE and 3388000 mN. Most of the black
spots you will find there represent the water table at the bottom
of previously mined pits. The rectangular black spots are heap
leach pads, left by prior operators.
Since this past summer, data
has been gathered from a variety of sources, now being fed into
a computer model that will be a prime source of guidance for
drilling activity, set to begin in the New Year. The enormity
of this task is reflected in the following description of available
data: 1,017 reverse circulation drill holes, totaling 98,620
meters; 225 diamond drill holes totaling 21,122 meters; 34,000
rock samples; and 21,000 soil samples. Moreover, 55% of the district
is covered by a soil geochemical survey. In today's dollars,
the value of this data would be in the tens of millions of dollars.
In other words, while Animas Resources is only five months old,
this early stage explorer is already well advanced by a wealth
of information now being modeled for the first time using previously
unavailable computer techniques. District-wide data, sourced
from different property acquisitions, offer synergy in consolidation,
pointing to potential for resource extension (along trending
structures) much larger than offered by piecemeal consideration.
Between 1991 and 2000, previous
operators mined 564,000 ounces of gold (with an average grade
of 2.13 grams per tonne) from an historic (non-compliant) resource
estimate of some 1,280,000 ounces. This means that historic estimates
would leave 720,000 (non-compliant) ounces still on the property.
Of the total district, gold was produced from 22 open pits in
an area of 72 square kilometers, or just 11.4% of the total land
area.
Campbell Resources, the last
major operator in the district, had acquired its portion of the
property from Phelps Dodge in 1995 for $10 million. Campbell
ceased operations in 2000, resulting from gold prices falling
to under $300/ounce.
An Expanded Paradigm
As intimated above, efforts
going forward, in part, will be targeted at fleshing out the
potential for this district to offer a multi-million ounce Carlin-type
deposit. Geologists on the scene described the ore bodies at
surface to be showing very little erosion. Suggested by this
is that already mined ore may represent just the beginning, with
potential for more ore and even better grades at depth. With
very little past production and exploration below 300 meters,
a Carlin-type deposit (to depths of 1,000+ meters) remains to
be tested and proven.
As a bonus, all mineralization
is seen as post major structure on the property. This means that
'following the bread crumbs,' as it were, will be much easier,
and much more predictable than would otherwise be the case.
Of significance, the framework
of past exploration and production was restricted to oxide-based
mineralization. This was because the only extraction method then
under consideration for this property was heap leaching. For
a backgrounder on heap leaching, see the links:
http://www.rthiel.com/Heap_Leaching-GRI_Dec03.pdf
and
http://www.bullion.org.za/MiningEducation/Gold.htm#science
This process offers lower relative
capital and operating cost in comparison to other methods, but
is restricted (without adding another intermediary stage) to
oxide ore. While a heap leach production facility (if I heard
correctly) could cost as little as $20 million to build, the
process is not nearly as effective as other, more expensive,
extraction methods. The gold now sitting in the tailing dumps
for the 22 mined pits at Santa Gertrudis could range to 50% of
the original contained metal. These tailing dumps may re-enter
the picture at some future date, either in newer technology heap
leach processing or in some other, larger more sophisticated
facility.
The property adjacent to a
number of mined pits is covered by 20-30 meters of post-mineralization
gravel. Much of this area (of many square kilometers) remains
untouched by exploration. John Reynolds means to extend efforts
meaningfully into this area in the immediate future, seeing no
reason to believe that mineralization stops with the arrival
of this gravel. The potential, he says, is huge, yet remains
to be proven.
Reynolds and Christensen
Because of the mindset to extract
gold using the low cost heap leach method, whenever sulphide
ore was encountered, exploration by prior operators stopped.
Animas, however, views this property/district through a much
wider angle lens. In all fairness to prior operators, the rising
price of gold allows Animas to do so. Sulphide ore is not seen
as an impediment but as a valued resource. With the Carlin-type
target in mind, identified a full decade ago by a former operator,
Animas sees its potential as entirely open, both in lateral extent
and at depth.
The upside potential for this
project is significant. As an investor, though, one should always
be asking the question, "What's my downside risk?"
Here's what I see as the worst-case scenario. Animas is
an exploration company, not a producer. The clear objective of
this Company is to take the resource definition to a level where
a larger operator (perhaps on a joint venture basis) can take
it to full realization of its potential. As exploration activities
ensue, however, this big picture objective (in the worst-case
scenario) may slip further from reach, perhaps only on a delayed
basis, but out of reach nonetheless. For a relatively low end
capital investment, and within a year from the start date, Animas
could put the heap leach model back into action, producing 60,000
ounces per year. Back in 2000, one site targeted to be mined
(but abandoned when the price of gold dropped below $300) had
been estimated to contain 125,000 ounces of gold. That site alone,
within two years of production, could both pay for its capital
cost, and generate new cash flow in the range of double its current
market capitalization, hence funding future exploration activities.
From a risk reduction viewpoint, that's not a bad Plan B. Keep
in mind that the Company has inherited an historic resource estimate
(non-compliant) of some 720,000 ounces.
As I see it, the greatest challenge
facing this Company may be the size and scope of the district
and what it offers for exploration. To get 'permission' from
the market to take this project to the next stage, Animas must
find and remain focused on the best bet target(s). It would be
far too easy to become enamored with too many targets. Greg McKelvey
recognizes this as key to his success as the project leader.
This balancing act for staged growth will be pivotal, as the
Company progressively earns enough rope by which to hang itself,
striving all the while not to do so. Nature of the beast.
Country Risk
In an unrelated Behre Dolbear
report (2006) (see the link: http://ratcliffephotos.free.fr/kamoto/CountryRankings2006.pdf),
Mexico was tied for 4th in a ranking of 25 countries for risk
in mining investment, behind only Australia, Canada, and the
U.S.A. This low level of country risk, in the general case, coupled
with pre-existing mining activity on the Santa Gertrudis property
suggest that, while nothing is airtight, this element is on the
periphery of the radar screen. Nonetheless, the appointment to
the Advisory Board of a fellow who co-drafted Mexico's current
mining laws indicates that Animas takes nothing for granted.
Plans for Near-term Activity
- Mine Development Associates
(Reno) has been engaged to work on future resource estimates
- Major Drilling of Mexico (subsidiary
of Major Drilling Group International) has been contracted for
a program to drill 8,000-10,000 meters, beginning in early 2008.
One drilling rig is scheduled to arrive in January, another in
March. This said, McKelvey insists that the drilling program
will be driven by data (of which there is much), not the other
way around. At the same time, drill rigs are not plentiful in
supply, so the Company may bite the bullet and acquire rigs as
they become available, whether or not the timing is perfect from
a data-driven perspective. Assay results will lag drill hole
completion by about six weeks. Waiting time, with just a couple
of drills turning, will create some slowdown in using results
to guide subsequent drilling. Not great, but par for the course
in this part of the world
- Hire two new geologists in
the New Year. Geologists are a scarce resource these days. This
shortage will continue to be a challenge in the immediate future
- Finish refurbishment of residential
facilities at the base camp in preparation for the upcoming drilling
program. Looks pretty much done already. Paint on the exterior
of the main buildings was being applied during our site visit
- The hope is for an NI43-101
Technical Report by the end of the first quarter of 2008, but
a shortage in those qualified to write such a report may push
this into a May-June 2008 time frame
- Complete infill drilling to
elevate the resources as necessary
- The current budget for 2008
of $2.5 million is likely to be raised, with new available funding.
The next 18 months of operations is covered by current resources.
Bonus Program Tied to Performance
in the Business of the Company
While officers of the Company
are shareholders, they are not 'huge' shareholders. Their opportunity
to earn significant shareholdings, however, is not insignificant.
Rather than a 'willy-nilly' share granting program, Animas has
constructed a bonus program that rewards officers of the Company
when they place the Company in a position to reward shareholders
at large. Their bonus plan is tied to defined resources. One
million shares will be granted when 1.6 million ounces of 43-101
compliant resource has been achieved. Another one million shares
will be granted when 2.7 million ounces of 43-101 compliant resource
has been achieved. Were I a shareholder in this Company, with
current outstanding shares of less than 22 million, and a market
capitalization of just $27 million (with a hope to quadruple
that to $100 million before the end of 2008), I'd be pleased
to share the inevitable rewards of such a program. With completion
of the current financing, the Company will hold greater than
$7 million in cash. This should provide a good kick-start in
efforts to bring the management team (and shareholders at large)
one step closer to sharing in the bonus program.
Graham, Christensen,
and Phillips
Animas Resources has acquired
a huge exploration opportunity at a significant discount, and
possessing what I see as minimal downside risk, if managed well.
Considering the historic resource, the caliber of the team in
place, and the exploration potential of this district the market
capitalization of just $27 million sounds to me like opportunity
knocking. With a share price of $1.25, opportunity knocks loudly.
Buying at a discount what someone
else has created at great expense has always been a good business
practice. Looking at such a project through a newer, wider, and
deeper lens, and utilizing technology tools not previously available,
offers great potential to the talented and the lucky. The Animas
team is clearly talented. As for the lucky, what's that old saying?
Luck is the place where preparation meets opportunity. As always,
time judges all. This writer is neither a licensed financial
analyst nor a geologist. Please do your own due diligence.
Kevin Graham
email: kevin@lookoutmanagement.com
Animas Resources website
Please click here to rate this
report: http://survey.corplink.com/LMI/ARSVR2007.aspx?E475H6OE
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