#20190 - Casey

MINING MANITOBA

Metal mining in Manitoba is one of the province’s most important industries. Manitoba contributes significant amounts of several metals to the global market each year, including zinc, copper, nickel, gold, and tantalum. Despite this, Manitoba has been undervalued as a mining jurisdiction, because in recent history their mining regulations were stricter than those in other Canadian provinces, such as British Columbia and Ontario. Thanks to several sweeping changes made by the provincial government in 2002, however, Manitoba has turned a new leaf.

Many Manitoba programs and initiatives are aimed specifically at attracting individuals and companies interested in doing exploration work in the province. Manitoba is even looking to expand its mining industry through government grants and subsidies. Furthermore, with majors beginning to relinquish former large land holdings, junior companies are now able to acquire prospective exploration properties in Manitoba that have been unavailable – and unexplored – for many years. As we have seen via the news generated by VMS Ventures’ (V.VMS, more on this shortly) new base metal discovery in Manitoba, such plays can work out very well.

In the last few years, Manitoba has gone from one of the less desired mineral exploration districts in the world to perhaps one of the best subterranean investment opportunities for metals today.

Why? Read on.


A Geological Overview

To understand why Manitoba makes for such an excellent area for exploration, we need to start with the region’s geology. Millions of years ago, the Canadian Shield (comprising the northern portions of the Prairie Provinces as well as parts of Ontario and Quebec) was covered by an ocean. The unique conditions on the ocean bed in those long-ago times would eventually lead to the formation of the ore bodies and extensive mineralization observed in north and central Manitoba. As the ocean floor slowly rose out of the waters, it would form much of what is now north-eastern Canada.

One of Manitoba’s most prominent features – one that makes it exceptionally prospective for the mining industry – is a large number of Precambrian greenstone belts in the province. Greenstone belts are composed of prehistoric seafloor basalt and other ocean bed volcanic rocks. They are often rich in various metals, thanks to the heat and pressure resulting from their long burial under water.







The potential of the greenstone belts is apparent from where Manitoba’s current producing mines are: as you can see in our geological map, all but two of the largest mines lie within greenstone belts. The exceptions, the Thompson and Birchtree mines, lie within the Thompson Nickel Belt, a major Paleoproterozoic deformation zone that trends north-east. This belt hosts significant deposits of nickel sulfides. The Fin Flon belt is one of the largest volcanogenic massive sulfide (VMS) districts in the world, containing 27 copper, zinc and gold deposits, from which more than 183 million tonnes of sulfide ore has already been mined. From a geological standpoint, Manitoba is a blessed area with a large amount of untested potential for exploration.


Manitoba Mining: A Brief History

Manitoba was originally home to a number of large companies operating out of a few specific mine sites. An example of this would be Sherritt Gordon Mines Limited (now Sherritt International Corporation). Their mine was extremely important to the development of Manitoban enterprises; it was basically the forefather of subsequent metal mining in the area. Following the shutdown of the mine in 1940, the equipment, workers, and even their houses were moved by sleigh over ice to Lynn Lake for a new mine to be constructed where one of the world’s largest nickel strikes was found. The Lynn Lake mine was the fourth largest nickel deposit in North America at the time, and remained in production until the mine ceased operations in 1976. Base metals went into decline and base metal mines were shut down, but nearby gold mines were started at about the same time, and they operated until near the end of the 20th century, when the price of gold plummeted.

The town of Lynn Lake suffered as a result, but survived. With revived metal prices, there are some 150 abandoned or orphaned mines in the province that could be reactivated. The best place to build a mine is usually right beside an old one, so explorers and project developers are starting to return to areas in Manitoba like Lynn Lake.

During the period of time when these mines were in operation, however, there was very little room for junior companies to explore. That’s because larger companies, such as Inco or Hudson Bay Development, both multi-billion-dollar companies, had already staked much of the land in and around their mine sites to keep potential competition away. However, as low metal prices forced more and more mines to close, especially in the later 1990s, much of this property was freed up – abandoned mines and all. At that time, companies with larger land positions came to realize that they could not keep holding on to their huge tracts of land. It was expensive. Lower cash flow from depressed metal prices meant less money put into developing properties. These major companies have cherry picked what they have retained, but that has still allowed junior companies to snap up highly prospective land for the cost of staking.

In spite of this, due to an antiquated mining policy, juniors were still slow to explore the vast potential of Manitoba, and the province became one of the most underinvested mining regions in all of Canada. In order to revitalize Manitoba’s floundering metals industry, the government decided to commission a task force to report on the problem. The task force was surprisingly helpful, and its work eventually resulted in the government reforming its mining laws, culminating in the sweeping changes enacted in 2002.


Inducing Exploration: MEAP and MPAP

As a consequence of the report produced by the Mining Task Force in 2001, Manitoba decided the best way to revive the industry would be to attract newer, younger companies. However, many junior mining companies lack the capital for the acquisition and development of more than one or two properties at any given time. In order to provide these juniors with a reason to acquire properties in Manitoba, the government decided to introduce two new subsidies: the Mineral Exploration Assistance Program (MEAP), and the Mineral Prospectors Assistance Program (MPAP).

The first program, MEAP, specifically targets companies and individuals looking to do non-fuel mineral exploration in Manitoba (neither natural gas nor petroleum). By providing financial assistance for up to 35% of a company’s approved eligible expenditures per fiscal year, MEAP is a powerful incentive for many junior exploration companies and even individual prospectors: a major chunk of their exploration costs in Manitoba are covered by the government. To sweeten the deal even more, the other program, MPAP, provides a further grant of up to 50% of a prospector’s estimated costs. That’s particularly encouraging for individuals, who often stake properties by themselves before later selling them to mining companies, capital pool companies, and the like. Ethically, we’re no fans of robbing Peter to please Paul here at Casey Research, but government largess has made Manitoba highly competitive in Canada’s mineral exploration industry – a competition in which other provinces also offer incentives (especially Quebec). Yearly mineral exploration and deposit appraisal expenditures have been steadily growing in Manitoba since 2001.


Manitoba Mining and Exploration Today

There’s a growing number of companies in Manitoba, both young and old. Many of the larger companies have been in the area since the ‘60s and ‘70s, while most of the juniors have staked land only recently, following the mining policy changes in 2002.Charts A, B and C show Manitoba mineral companies, sorted by market capitalization, with producers in grey.

















Note that of the producing companies, most are quite large, the smallest of them being Sangold with nearly $250 million in market capitalization. Given the province’s extensive history of production, the low number of producers suggests that there is still plenty of potential for exploration and development in Manitoba – this market is far from being saturated.


Regional Breakdown

To better understand the opportunities, let’s look at Manitoba’s mineral companies by region.







The northwest region is a peculiar one, as it is characterized mostly by companies looking to stake properties on trend with the uranium deposits in Saskatchewan’s Athabasca Basin, to the southwest. It is very difficult to put any sort of valuation on this land. Most of these projects are extremely early stage and are all unlikely to become mines or even have defined deposits anytime soon. This is further complicated by the fact that there is an important native population in this area, with a significant tract of land. That’s a source of potential future conflict, if any of these properties do indeed move towards becoming mines. As we have seen before, native situations can bring down even the best deposits in the world, let alone extremely speculative ones.







In the northeast region of Manitoba, diamonds are the primary focus. Among the juniors, Peregrine Diamonds (T.PGD) and Stornoway Diamond Corp. (T.SWY) are exploring for diamonds in the northeast’s kimberlite deposits. De Beers Canada is also in this region. Diamond exploration is extremely risky; the odds are an order of magnitude longer than in exploring for gold. It’s a volatile business, since at the end of the day, the diamond market is a very manipulated and artificial market. At Casey Research, we’re not usually very enthused by diamond exploration companies, and we see no reason to make an exception here.







Here we find large swaths of greenstone belts, which characterize much of Manitoba’s most prolific mineralization. This area is rife with volcanogenic massive sulfide (VMS), orogenic lode gold, and various other deposit types. Another trademark feature of this region is the previously-mentioned Thompson Nickel Belt. The two mines operating in the belt, the Thompson and the Birchtree, are both owned by one of the world’s three largest diversified mining conglomerates: CVRD Inco Limited (NYSE.RIO). As one of the largest and oldest companies in the area, Inco has already identified its priority targets and has reduced its land holdings to a smaller number of key properties.

Xstrata Nickel (LSE.XTA) is also in this area, and has a claim in the Thompson Nickel Belt as well. Xstrata Nickel is the world’s fourth largest producer of nickel. After acquiring Falconbridge via hostile takeover in 2006, they also inherited a number of projects in Manitoba. Unfortunately, no information concerning this project is available yet, although it should be noted that Xstrata Nickel applied for and received two MEAP subsidies from the Manitoba government.

VMS Ventures (V.VMS), one of the great junior plays in Manitoba, has a pair of excellent properties in this area. VMS was one of the first juniors to explore in Manitoba, beginning at the turn of the millennium. Once much maligned and trading at C$0.15 with a market cap of less than C$10 million, VMS now boasts a market cap north of C$70 million, thanks to a new base metal discovery (with gold and silver credits) elsewhere in the province. VMS’s properties in this particular region of Manitoba are limited to the Thompson Nickel Belt.

Another junior we find interesting in this area is Rolling Rock Resources (V.RLL), which has the Domain and Monument Bay gold projects in the God’s Lake greenstone belt to the northwest of Garden Hill. RLL owns 51% of Domain, which has seen shallow drilling with results including 5.4 g/t Au over 4.1 meters and 12.6 g/t gold over 1.3 meters. RLL has the option to increase its interest to 65% by spending another C$700,000 in exploration on the Domain project, at which point a joint venture will be formed with New Dimension Resources (V.NDR). Results from a recent winter drill program on the Domain property are pending. Monument Bay is owned 100% by RLL. It has seen extensive drilling and has a 43-101-compliant resource estimated at 1.1 million tonnes averaging 15.4 g/t Au at a cut-off of 8 g/t (about a half a million ounces of gold). RLL is pursuing a scoping study to determine the financial feasibility of performing underground development work on Monument Bay.

Callinan Mines (V.CAA) is one of the major movers and shakers in the area. The company is over 80 years old and continues to perform exploration work through properties in the Thompson Nickel Belt and other areas. Through a historic royalty interest in the Callinan mine in Flin Flon, the company derived C$400,000 in royalties last year. Last quarter the company received a quarterly payment of C$2.36 million from HudBay Minerals (T.HBM) as part of their 6.67% of net profits from HudBay’s new 777 mine in Flin Flon. The deal with HudBay was signed in 1998; however, last March, Callinan sued HudBay over what it perceived to be a lack of transparency in HudBay’s auditing and recording procedures at the Callinan and 777 mines. This lawsuit is still ongoing but has not significantly affected the share price of either company, but it’s enough of a cloud to keep us away.







This region of Manitoba is perhaps the most established mining district in the province. It contains the city of Flin Flon, an important city in Canadian mining history and still so today. Flin Flon was founded in 1927 by Hudson Bay Mining and Smelting to exploit the large copper and zinc ore resources in this region. Though the Flin Flon deposit was found in 1915, the mine was not built quickly due to the low-grade nature of the orebody and the high cost of energy in the region. In fact, to build the hydroelectric power plant for the mine, one of the most ambitious winter hauling enterprises in Canada was undertaken. Over 35,000 tons (about 450 trains) of material was shipped over two years. The smelter, power plant, and mine were finished in 1930. The mine quickly grew in production and manpower as the Great Depression brought many young men to the town to work as miners. (Some Canadians may also recognize Flin Flon as the birthplace of Bobby Clarke, one of the most durable and talented hockey players in NHL history.)

The midwest region hosts two large patches of greenstone belts; one centered around the Snow Lake area and another one around the Lynn Lake area. The area between these two lakes is extremely prolific and is well known for its numerous former and current mines, such as the Ruttan and Callinan mines. The Ruttan mine was operated by Sherritt Gordon Mines and closed in the summer of 2002; it was formerly a copper-zinc-silver mine that was largely responsible for the extremely quick growth and development of the Leaf Rapids mining community, which sprang up in only five years to service the mine. The Callinan mine is operated by HudBay Minerals, though as its namesake suggests, the mine operates on Callinan property, which allows Callinan to derive a 6.67% royalty. Last year, the Callinan mine produced 1.6 million tonnes of copper-zinc ore. There are also a number of smelters in this area such as the Flin Flon smelter operated by HudBay, which processed 2.3 million tonnes of copper/zinc ore in 2006. Extensive infrastructure has been built throughout the entire area, allowing for ease of access to claim sites and rapid development of future mines.

VMS Ventures has properties in the areas around Snow Lake, Lynn Lake, and Leaf Rapids, most of which are prospective for VMS-type deposits. The company has in fact made a new high-grade discovery on their Reed Lake property, where last October they intersected 2.5 meters of 15.3% copper within 10.5 meters of 11.2% copper, within 43 meters of 4.4% copper. VMS also found zinc, gold, and silver at rates consistent with those of historic producing mines in the VMS belts of the area. See our New Company Recommendations elsewhere in this issue for more on this company.

Also a company of note here is Hudson Bay Exploration and Development Company (HBEDC), a wholly owned subsidiary of HudBay Minerals, which is another old company that has been in the area since well before the juniors came to stake their claims. HBEDC was incorporated in 1937. After a period of low metal costs and depleting resources, HBEDC was on the verge of dying when HudBay Minerals bought the company in the ‘70s. The company quickly began to explore aggressively and to improve mining methods, metallurgy, and refining techniques. Sensing a future demand for processing mills, the company also began to improve its smelters and refining facilities (such as the Flin Flon smelter). The improvements were successful and the smelters operate at capacity nearly every year, propelling the shares of HudBay from C$2.50 in 2005 to a peak of almost C$30 in 2007. Like most large companies in the area, however, HudBay relinquished large tracts of land staked early on and kept only a few specific properties where drilling had already yielded proven reserves. HudBay has four claims near Snow Lake. It also operates the 777 and Trout Lake mines near Flin Flon and the Chisel North mine near Snow Lake, in addition to a concentrator, copper smelter, and zinc plant at Flin Flon. HudBay last traded at C$19.54 and has a market cap of C$2.5 billion. Last year it produced a combined total of 2.5 million tonnes of copper-zinc-gold-silver ore.

Pure Nickel (V.NIC) is another exploration-stage company in the area with 100% interest in a number of land packages in Alaska and Saskatchewan. The company is well funded with C$16 million in cash. Pure Nickel holds two properties optioned from Falconbridge in the Thompson Nickel Belt region, including one joint venture with Crowflight (V.CML). Crowflight is an exploration company working on the transition to production; it has completed a feasibility study on its Bucko Lake project in the Thompson area, with an inferred resource of 1.6 million tonnes of nickel at a cut-off grade of 1.5% Ni. Recently Crowflight acquired a C$55 million debt facility to cover the costs of building the Bucko Lake mine. This is planned to cover both construction and start-up costs. Crowflight expects to achieve production by mid-2008.

Halo Resources (V.HLO) is another solid exploration company in the area. Halo staked its properties in Manitoba in 2005, including the Sherridon VMS project near Flin Flon. In addition, the company holds a pair of properties in Ontario and the Duport gold property in Alaska, which has a 43-101-compliant resource of 313,000 oz of gold in the Indicated and Inferred categories. Halo’s Sherridon claim is located in the Flin Flon greenstone belt and has seen 11 million tonnes of historic production. 15,000 meters of drilling have been completed since late 2006. With year-round access to the site, two drill rigs going, and a third rig coming online this year, the company plans to drill 50,000 more meters, more than enough to produce results that can make or break the company. This is a story with plans of near-term production and exploration upside. However, the production would be lower grade, even if they do have an agreement in place with HudBay. It’s on our watch-list.







* Stars indicate approximate locations of approved MEAP projects

Unlike Manitoba’s other regions, companies in the south are fairly sparse, as the south is where Manitoba’s major urban centers lie. In addition, there are a number of large native reservations in southern Manitoba, further complicating the extent to which mining companies may stake their claims. One of the more solid companies in this area is Harvest Gold (V.HVG), a company that Casey Research has looked at in the past. One of Harvest Gold’s projects is in the Rice Lake greenstone belt, which has a historical production of 1.7 million ounces of gold. Given recent high-grade gold discoveries, Rice Lake may have been under explored in the past.

There are numerous other companies in the Rice Lake area, such as Wildcat Exploration and Tiberius Gold. Wildcat is a good company with some well-positioned projects, though its current financing issues do not make it an attractive speculation for us. Tiberius is not a publicly listed company, but it has some excellent claims in the Rice Lake area and started seed round financing not long ago – another one to watch.


Manitoba Politics

Manitoba has traditionally voted either Progressive Conservative or NDP. The last time the PC Party was in power was in 1988. Under the PC, Manitoba’s corporate taxes fell, while the government also managed to balance the provincial budget for the first time in 20 years. A number of factors, such as the Independent Native Voice vote manipulation scandal, declining liberal support and rising unemployment rates, led to the NDP taking over again in 1995.

However, the NDP government currently in power in Manitoba is very supportive of the mining industry. The many programs they have instituted to bring the industry back to life are solid evidence of this. Back in 2001, they decided that they needed to improve how they did mining. So, the government sat down with a number of different mining companies and discussed what each company would like to see implemented in Manitoba. Those talks eventually formed the basis of the policy changes implemented in 2002. As a result, the following year Manitoba was rated as having the number one mining policy in the world by the Fraser Institute, a Canadian think tank recognized around the world for its rating of jurisdictions by mine-friendliness.

The NDP places a heavy emphasis on organized labor and enjoys 48% of the popular vote as well as 36 of the 57 legislative seats in Manitoba, which is almost unheard-of in a three-party system. Due in part to their stance on labor, the NDP provides many training programs targeted at a wide range of fields, including mining. The NDP has won control of the provincial government for the last three terms and seems to be fairly well entrenched in the province.

It’s odd that a different chapter of the same political party that previously all but destroyed mining in British Columbia should be bringing it back to life now in Manitoba. And yet, the NDP’s stability suggests that the current trend of encouraging prospecting and mining activity in the province will continue into the foreseeable future.


Icing the Cake: Other Key Factors

In addition to MEAP and MPAP, many other initiatives were introduced following the 2001 Mining Task Force report. Chief among these is a series of tax credits and allowances for mining companies in Manitoba. The effect of these is to reduce the basic provincial mining tax rate from 18% to an average effective rate of 9%. By way of comparison, BC has a mining tax rate of 13% and Ontario’s is 16%.

In order to follow up the Mine Closure Regulation enacted in 1999 that required the filing of mine closure/decommissioning plans as well as environmental remediation considerations by all new and existing mines, the Manitoba Government also brought the Orphaned/Abandoned Mine Site Rehabilitation Program into existence. This program provided government funding for the treatment and management of mines that had shut down before the introduction of the Mine Closure Regulation. These programs appear to have improved the public image of the metal mining industry in Manitoba and to have encouraged positive reception of new mining initiatives.

Far be it from us to praise any government intervention into economic spheres of activity, but when that intervention undoes some of the harm done by past governments, it can’t be all bad. Love or hate the NDP, in Manitoba, they have incented a lot of new mineral exploration activity, and we are already starting to see the results.


Conclusion

VMS Ventures has shown that there’s plenty of opportunity for juniors to make important new discoveries in Manitoba. There’s no question that the geologic endowment is there. We believe there are more discoveries on the way, and good money to be made speculating on which companies are best positioned to do so. We make some a recommendation on VMS elsewhere in this issue. But as always, we encourage readers to educate themselves and do their own homework. We can’t kiss all the girls, so don’t be shy about asking one that we haven’t gotten to yet out to dance. Just don’t get so romanced that you forget the 8 Ps.


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NEW COMPANY RECOMMENDATIONS

Below are our favorite Manitoba play and a Mexican gold play to put on your watch list. Don’t rush out and buy recklessly; read each recommendation carefully before taking action.


VMS Ventures
V.VMS, PK.VMSTF, http://www.vmsventures.com

Price
Share: C$0.86
MCap: C$91.8M
On: 2/29/08

Shares
SO: 106.7M
FD: 130.3M
As of: 1/08

Warrants
11.4M
C$0.34 – C$2.25
Exp: 11/2008-12/2010

Options
12.2M
C$0.12 – C$1.00
Exp: 08/2008-01/2013

Cash
C$23M
Burn rate:
C$198,700/mo
As of: 12/07



BUY—When there’s a gold rush, who’s most likely to profit from the discovery? The people already there. When it comes to Manitoba juniors, that’s VMS. The company has been exploring in the province since 2001, a full year before Manitoba’s mining policy reform was enacted, and they’ve been adding properties ever since.

Note: In the interest of full disclosure, we want you to know that some members of the Casey Research team took part in an early financing in VMS. This really is our favorite play in the area. Some of us who made that bet – before VMS’ big discovery – have already reaped great rewards and taken profits. However, even though this is largely a base metal story at this point, it’s not every day you come across an important new discovery, and we do see real potential for a double or better in 12 months. So we have no qualms about recommending the company, especially since it’s off substantially from its highs last year, with no company-specific bad news.

Let’s take it by the Ps.


People

CEO Rick Mark is a familiar face to us, from some of the other companies he’s involved with, including Harvest Gold (V.HVG) and Pancontinental Uranium Corp (V.PUC). With over 20 years experience managing public companies, Rick knows how to put together a good team and keeps the financial side of things running smoothly.

VMS’ geological team is headed by the company’s president, John Roozendaal, who spent much of the last 15 years exploring in the Thompson Nickel Belts of Manitoba, as well as looking for precious, base and specialty metals elsewhere in North America. He has led exploration teams for nickel in the Thompson Nickel Belt and for high-grade, shear-hosted gold in the Yellowknife gold camp. We’ve met with John numerous times and think highly of him.

Another key player is George Gale, a 40-year veteran mineral deposits geologist. George headed the mineral deposits section of the Manitoba Geological Survey from 1977 to 1999 and has focused a lot of his studies on volcanogenic massive sulfide (VMS) type deposits. He pioneered many of the techniques now used by prospectors in Manitoba to detect mineralization and is integral to VMS’ exploration program.

VMS’ management and advisors have hundreds of years of combined experience, including expertise in their region of focus. We like this team.


Property

VMS was incorporated from a shell as Rare Earth Metals in March 2000, just before the tech bubble popped. At this point, when the herd of investors was scrambling to get in on the high-tech market, John Roozendaalgot together with George Gale and headed to Manitoba to stake what they considered to be the best properties, grubstaked by Explorers’ League honoree Lukas Lundin with C$1.25 million.

Seven years later, people have started clueing in on Manitoba’s mineral potential – and government handouts, which will attract all sorts of prospectors, with or without scruples. But VMS has been there all along, taking its time to pick up outstanding properties.

VMS’ main project is the Reed Lake project located in the Snow Lake greenstone belt near Flin Flon, Manitoba. The area contains over 20 past and producing polymetallic (Cu-Zn-Au-Ag) mines and is the most prolific belt of its type in the world. VMS holds over 70 square kilometers of property in this area and they are currently drilling the last holes of an initial 40-hole program at Reed Lake. The very first hole they drilled returned spectacular grades, intersecting 2.5 meters of 15.3% copper, 1.3% zinc, 2.0 g/t gold and 38 g/t silver. That was within 43 meters of 4.4% Cu, 1.6% Zn, 0.9 g/t Au, and 13 g/t Ag.

Since then, the drill program has advanced to hole number 32 (with some skipping around for reasons of drilling practicality). Some holes have failed to hit pay dirt, but nine have hit “near solid sulfides” over widths mostly in the 20- to 40-meter range. As with Virginia Mines’ Coulon project in Quebec, when the sulfides are what you’re looking for, you can’t tell precise grade, but you can tell when you’ve hit something of value. Assays are still pending on most of the holes that hit near solid sulfides, with the few assays received thus far correlating well with grades that look economic: 26.3 meters of 1.0% copper and 4.45% zinc, 43.1 meters of 0.72% Cu and 4.27% Zn, 31.7 meters of 2.1% Cu and 3.6% Zn (including 5 meters of 5.4% Cu and 3.5% Zn).

The blanks are not overly concerning at this point, not just because this is early-stage drilling and some misses are to be expected, but because of the type of target being drilled. VMS deposits tend to come in clusters – they’re smaller than disseminated ore bodies, but higher grade, and their cumulative tonnage can contain world-class quantities of metal. The company has eight geophysical targets (so far) at Reed Lake, each half a kilometer long or better. It’s more than a little surprising that they hit the high grade with their second hole, and not in the least surprising that they are hitting some blanks as they figure out the orientation of the “lenses” of mineralization.

The results thus far are so encouraging, in fact, that the company was able to raise C$19.5 million last October at C$1.50 (just over twice the current share price), thus assuring ample funds on hand to keep after the Reed Lake targets. Management says they have no intention to stop at the 40 planned holes, but intend to just keep going until they run out of ore. That’s basically the same thing Andre Gaumond is doing at Coulon – but VMS has no JV partner earning an interest in the project.

And Reed Lake has terrific infrastructure advantages, being in an established mining camp, with smelters looking for feed in the vicinity.


Other Properties

All of VMS’ properties were staked/acquired near old mine sites in the major belts of mineralization in Manitoba. There’s no better place to find a new mine than beside an old one. With extensive known mineralization in these areas, VMS stands a higher chance of making more discoveries. And the infrastructure is also already there to support their mines if they do.

Among VMS’ other properties in Manitoba, two nickel-copper projects are particularly interesting. One is the Lynn Lake Gabbros project in the Lynn Lake district. The other is the South Bay project near Leaf Rapids. Lynn Lake is the third largest historical nickel-producing region in Canada, and VMS has optioned five claim blocks in this area. A 2004 drill program on the South Bay property failed to locate an extension of known mineralization but did find sulfide iron formations, which are the basic building blocks of large nickel sulfide ore bodies.

Another VMS property we like is the Eden Lake Rare Earth Element (REE)-Uranium property, which the company has held since 2001. REEs are utilized in the construction of many high-tech devices. These metals’ markets tend to be relatively small and opaque, but their prices tend to be high. Currently, about 90% of North America’s REEs is imported from China, which is consuming more and more of its own production. Basic exploration work has been undertaken on Eden Lake that intersected the uppermost portion of mineralization, a hopeful sign of a larger system underneath.

With so much of the market’s attention (rightly) on Reed Lake, VMS is looking for suitable partners to joint venture these and other properties with.


Politics

As per our report on Manitoba in this issue, the province is currently rated the number one jurisdiction to do mineral prospecting work in the world. This is one of the reasons we were drawn to VMS in the first place; it staked its properties before the rush, and it already has the makings of an important discovery developing.


Promotion

As mentioned in the People section, we’ve known several members of this team for quite a while, and one thing they do know how to do is promote. That’s a good thing – a very good thing, since they do have something legitimate to promote. The hay management made while the sun of initial discovery was shining could last them years, or fund a very aggressive work program should the ongoing results merit it. Either could add a lot of value, and it’ll be because of competent promotion of the company’s new find.


Paper & Phinancing

For a company that is not particularly near to production, VMS does have a lot of paper issued and outstanding. However, most of the unexercised warrants (eight million) are well out of the money at C$2.25, and about half of the options (six million) are out of the money at C$1, and have a long time to go before they expire. There are some cheaper warrants due to expire at the end of this year (at C$0.34), but most of the cheaper paper was cleaned up last year – and that expiry date is many, many drill holes in the future.

So, the float is large, but the dilution has been kept to a minimum, and the company cashed up at very advantageous terms, leaving it with a current cash position of about C$23 million. It’s a good balance.


Push

VMS has the projects and the cash to deliver steady results throughout this year and beyond, so we expect steady progress. But there’s good reason to act quickly; those holes with wide intersections of nearly solid sulfides… no one can say exactly how much they will grade, but you can see the copper-zinc mineralization in them. We have no doubt that they will grade – and those results could be out any day now. That’s not encouragement to chase the stock, especially a base metal play of as yet unknown dimensions, but it is good reason not to delay building a position if you want to speculate on VMS.


Price

As you now know, VMS caught our attention before its big discovery, primarily because we liked the people involved. As soon as the Reed Lake discovery was announced, we thought that reduced the risk enough to recommend the company to subscribers, but the stock shot up far more than we expected it to, hitting a record high of C$1.76 last October. Since then we’ve been biding our time, waiting for weakness in base metals to bring the shares back into range. There may still be more weakness in copper and zinc ahead, but we feel that the company must be close to publishing results on holes we expect to get a lot of attention from the market – and, in spite of the last couple day's gains, the company is still on sale.

At today’s prices, we’re buyers. If copper takes a hit before VMS reports more assays and the shares go lower, we’ll buy more. And if the shares take off tomorrow, future short-term weakness in base metals might bring them back for a third chance.


Canplats Resources Corp.
V.CPQ, PK.CPQRF, http://www.canplats.com

Price
C$3.50
MCap: C$197.4M
On: 2/29/08

Shares
SO: 56.4M
FD: 66M
As of: 2/12/08

Warrants
3.5M
C$3
2/12/10

Options
4.2M
Avg. C$0.43
Avg. Exp: 4 years

Cash
C$16M
Burn: C$1.2M/mo
As of: 2/12/08



BUY UNDER C$3.00—CPQ is not a new name to us, but not just because it is the gold-focused sister company of Silver Standard Resources (T.SSO), a core holding in our portfolio. We recommended CPQ largely on that basis back in 2004, and then sold it in 2005, when the company just couldn’t seem to gain any traction on any of its projects. Following almost three years of “flat lining,” the company has come sharply back to life with a new discovery.

While we were conducting our due diligence, the January 21 correction brought the share price back from the initial discovery rush to a reasonable buying level, and we recommended it to our Casey Investment Alert Subscribers at C$2.57. We’d had CPQ in mind for the International Speculator all along, but new drill results sent the shares soaring again, not long after our CIA recommendation. We don’t bring this up to rub anything in, but to illustrate what is possible for those with the discipline not to chase a discovery and to take advantage of weakness instead.

CPQ may not return to looking undervalued again, but if general market jitters provide that opportunity again before it heads much higher – which we think it has excellent chances of doing – you should have the information you need to make a decision without having to wait for the next issue of this newsletter.

So here it is, by the Ps…


People

CPQ’s board includes Gordon Davis, Bruce Youngman and Tom Yip, all of whom have impressive careers replete with the sort of success you want to see in your management team. Importantly, the company shares management and corporate infrastructure with Explorer’s League Honoree Bob Quartermain’s Silver Standard. The company benefits by accessing SSO’s market development and financing expertise, geology and drafting, accounting, land titles and regulatory filings, and investor relations.

Bob’s involvement is enough, for us, on the People front, but considering the location of CPQ’s new flagship Camino Rojo property, just 50 kilometers from Goldcorp’s Peٌasquito project in Zacatecas State, Mexico, it is also worth noting that Tom Turner has been retained as a senior consultant for the project. Turner has over 35 years experience in geology and project management and was involved in the Peٌasco base metals discovery at Peٌasquito.

In short, these people know what they are doing.


Property – Camino Rojo

The company has a portfolio of precious and base metals projects in Mexico. Its top priority is the 100%-owned Camino Rojo project, a disseminated polymetallic (gold-silver-lead-zinc) discovery.

Most of the new mineralization is in an area of Camino Rojo called Represa. Represa was discovered the hard way: from scratch. Following a regional geology program, CPQ ultimately staked hundreds of square miles of land, then began back-hoe trenching and pitting along a large area in the vicinity of volcanic protrusions breaking through the overburden that covers the known mineralized area. That overburden isn’t very thick at Represa (2.5 to 10 meters), but it was enough to keep the mineralization hidden until now.

Drilling of an initial six holes on Represa began in November 2007, with the results revealing a largely oxidized mineralized body, starting at or near surface, hosted by silicified, laminated siltstones and fine sandstones. Hole CR-06 intersected 183 meters of 1.61 g/t gold, 12.84 g/t silver, 0.49% lead and 0.31% zinc, starting right at surface, including 72 meters of 2.59 g/t gold. The hole bottomed in mineralization. CR-03 hit 147 meters of 1.05 g/t gold and CR-01 hit 146 meters of 1.10 g/t gold, all with good silver-lead-zinc credits, all starting essentially at surface. Other holes were of lower but still potentially economic grade, making Camino Rojo a significant discovery. Within a month, CPQ shares had risen over 700%.

Step-out drill results have now expanded the mineralization to more than 400 meters of strike and a vertical depth of 175 meters. Still starting mostly at surface and ending in mineralization, best results earlier this year included 211 meters of 0.92 g/t gold, 15.52 g/t silver, 0.31% lead and 0.47% zinc, and 238 meters of 0.45 g/t gold (including 195 meters of 1.03 g/t).

The new holes that sent CPQ shares up over a dollar in the last two weeks include a hole that stepped out within the area of coincident geophysics and geochem and returned 218 meters of 0.91 g/t gold and 27.8 g/t silver. A second was a step-out just outside this area, and it intersected 237 meters of 0.62 g/t gold and 21.5 g/t silver. Both holes had respectable lead-zinc credits.

Twelve of fourteen holes reported thus far were mineralized from top to bottom, an outstanding achievement for an early-stage drill program. CPQ plans to keep drilling, of course, to see how far they can extend the oxide mineralization in all directions, as well as to test for primary sulfide mineralization at greater depth. This drilling will be accompanied by expanded induced polarization and ground magnetic surveys, to help find potential extensions of the mineralized zone and define new targets in adjacent areas.

Here’s the key to the speculation now: the footprint of the current area of mineralization is big enough to take an open pit down pretty deep, maybe as much as 200 meters in the center with basically no stripping, and possibly down to 300 meters or more without pushing the strip ratio too high. One could easily mine a million ounces of oxidized, heap-leachable gold from a pit that large at current grades, and maybe a lot more. If there’s a lot of primary sulfide material under the oxides, especially if the grades improve with depth, a bigger pit might take two or three times as much ore.

The analogue for this deposit is the nearby Peٌasquito mine – a true monster deposit with similar metals in oxides and sulfides (though at lower grades). As of June 2007, Peٌasquito had Proven and Probable gold reserves of 13.0 million ounces at an average grade of 0.44 g/t gold, and silver reserves of 864 million ounces at an average grade of 29.3 g/t silver (plus 2.67 million tonnes of lead and 5.81 million tonnes of zinc). Most of this gold is in the sulfides found under the oxide layer – a layer CPQ is only just starting to look under. The first gold pour from the Peٌasquito oxide circuit is expected in the fourth quarter of 2008. If CPQ really does have another Peٌasquito under the overburden it is just beginning to scratch beneath, it could easily become a ten-bagger.

Is that likely? Probably not; there just aren’t that many monsters of that size in the world. That said, in spite of all the implicit “ifs” in the above, only about two-thirds of the current area of coincident geophysics and trench and pit samples have been covered by widely spaced drilling. And because the overburden hides the mineralization from the usual geochemical tools, and this cover thickens to the south and east, the coincident area is open in those directions. There’s also a little-understood fault (again due to the overburden) to the southwest, across which there may be an offset to the known area of mineralization.

Plus, there’s a much larger geophysical anomaly to the west of the Represa zone where the overburden was too thick for pits and trenching. If that area turned out to be of similar composition and grade as Represa, we’re certain Camino Rojo would become a major, world-class discovery.

And if not, just proving up the current area of known mineralization would make for a very profitable operation in a great mining district – even at much lower gold prices than today’s. This minimizes our downside risk while giving us a great shot at all that blue sky.

The company has several other prospective projects as well, but all of them have taken the back seat since the discovery of Camino Rojo. Nevertheless, it’s important to know they are there, feeding the pipeline as Camino Rojo advances – but also because they show that the company’s discovery comes from adhering to proven processes, not simple blind luck.


Promotion

The SSO machine has been spectacularly successful at promoting their story, and the same resources are at CPQ’s disposal. Now that they have an exciting story to promote, we’ve no concerns on this score.


Politics

No place on earth is risk-free, but we like Mexico, and Zacatecas is a mine-friendly state with a lot of exploration and production activity ongoing, providing ample infrastructure and a trained work force.


Push

There is much to do, with metallurgical work being particularly important in adding (or subtracting) value to whatever number of ounces the company comes out with in its first resource calculation. Management expects a first stab at a resource on the oxides in Q308 if all goes well. Deeper primary sulfides would take longer.

But the next big push will come from step-out drilling and holes that test for deeper, primary mineralization. Management can’t comment on how that’s going, as it is material and they are still filing the paperwork on a just-closed financing, but the last press release says that this effort is ongoing and that results will be released as assays are available. Management reports that they are getting excellent turnaround time on expedited assays (about two to three weeks). And with the company cashed up, we expect the drill results to keep coming steadily throughout the year.


Paper & Phinancing

As is only logical for any company that sees its shares go through the roof, CPQ just cashed up to the tune of C$15.6 million. We’d have liked it if there had been plenty of seats at that table for our subscribers, but almost all of that financing was done in a bought deal. The company could easily have raised two or three times as much money as it did – that it didn’t says a lot about management’s commitment to current shareholders…and about where they think the stock is headed.

Those shareholders include management, which participated in this last financing and, along with insiders, now own about 20% of the company’s shares.

All previous paper is free trading and there were no warrants outstanding before this just-closed financing.

Water under the bridge now; what matters most is that the company still has a reasonable share structure and plenty of cash to pursue an aggressive exploration program this year.


Price

CQP is not cheap based on what we now know they have, and disappointing drill results could hit it hard – as could another general market scare. But it does have a significant discovery that looks a lot like a mine in the making, so we’re looking for market volatility to bring us another chance to buy.

We talked to Bob Quartermain about this, and, characteristically, he didn’t want to wave his arms and make outlandish claims. What he did say is that though he was already a significant shareholder, he bought more shares in the recent financing – and he has not taken any profits, in spite of the high multiple he has on his early shares.

That was the clincher for us. Nobody could blame Bob for taking a little profit after waiting so long for CPQ to deliver – but he hasn’t. He says it’s still “early days” and he’s not selling anything yet.

So, our formal recommendation is to Buy under C$3.00. (Though we could see placing speculative bets under C$3.25.) If it doesn’t retreat that much, there may still be a chance for the drilling to catch up with the market capitalization before the big blue sky gets a real test.

And if it doesn’t become a bargain again, we’ll have other picks soon. Keep a level head on this one – even the best discovery stories retreat from time to time.