“The Small Exploration Company Bankrolled by the Big Gold Players”

By Travis Johnson, Stock Gumshoe, April 5, 2011

It’s shaping up to be Ian Wyatt week here at Stock Gumshoe — yesterday I took a look at a veiled hint of a Polish natural gas stock, and today we’re looking at a tease that looks like it may have started a couple months back but has been recently re-invigorated (and I haven’t researched it before, so it’s new to me — and maybe to you, too).

The pitch this time is all about precious metals, which is not a surprise — and particularly about silver, which has been on an incredible tear this year. He teases a couple stocks, and uses the increasingly popular tactic of “giving” you a silver coin in exchange for subscribing to his newsletter (no, you don’t get the coin if you cancel during his “trial period”) … which sounds so much sexier than a $40 discount, right?

But anyway, the current rate is $195 … and I’d rather not pay that just to learn about another silver stock. So let’s try to identify it on our own, shall we?

There are actually a couple stocks teased in this letter, but the one that sounded most appealing to me was the most unusual one — it’s not just about one specific silver mine, though it does apparently have exposure to a site in the Sierra Madres in Mexico. No, it sounds like this one is much more diversified … here’s how he teases it:

The Small Exploration Company Bankrolled by the Big Gold Players

“You’ve probably heard that precious metal exploration companies are among the riskiest investments in the world.

“And for the most part it’s true. Most of them never produce a single ounce of gold or silver. Most of them are literal holes in the ground that people throw money into.

“But I’ve recently discovered a small metals explorer that’s doing it right.

“For one, they have the backing of one of the largest gold companies in the world. This huge gold company is lending them their help because they too realize the profit potential of the Sierra Madre region.

“But even better, this small explorer also has a variety of mining operations all over America, all in different stages of progress.

“For instance…

“They have access to gold and silver in the Sierra Madres…

·They have gold, nickel and copper mines in Alaska.
·They also have Uranium mines in Arizona.
·Copper mines in Nevada and Utah.
·And molybdenum mines in Texas and Montana.”

And yes, we’re told that the Sierra Madre project alone is apparently enough to drive the shares higher if Wyatt is right — in his words:

“While we wait for this company’s Sierra Madre silver production to come on line, we can rest easy knowing that they have many other projects in various levels of exploration.

“So the stock will remain relatively stable – and then when the silver production kicks in…

“Well, suffice to say that this company currently has at least $450 million worth of indicated silver reserves in its Sierra Madre deposit alone.

“Right now this company’s market cap is under $200 million. It’s not hard to see what will happen to this company’s stock price once they start bringing just a fraction of that $450 million deposit into production.”

So who is this? It’s a dreary, rainy day here on Gumshoe Mountain, but it always cheers me up to see the little lights coursing across the screen of the mighty, mighty Thinkolator … it had to chew on this one for a few minutes, but, lo and behold, an answer always come through:

Quaterra Resources (QMM in NY, QTA in Canada)

Quaterra is on some levels a “prospect generator” like some of the favorite stocks I’ve written about here before, including Altius Minerals (which is one of my largest personal holdings). They amass land positions, drill and survey to identify resources, and then bring in partners to do the lion’s share of funding for the drilling that will book actual reserves and then, hopefully, the planing and building of the mine — and in exchange for their early work “discovering” and staking the prospect and doing some of the initial exploration, they keep a junior ownership position in the mine.

Prospect generators don’t all work on exactly the same model (Altius, for example, tries to sell off equity holdings in mines at opportune times, spin off projects into public companies to raise money, and keep royalty positions in perpetuity), but their goal is to turn early exploration into something that has real potential value, but not to spend too much of their own money developing it — thereby cutting the risks considerably. And many of them, like Quaterra in this case and like Altius, try to have pretty diverse portfolios of assets that are in various stages of development — sometimes all within a small or defined geographic area where the company has particularly valuable expertise, or connections, or historical data, and sometimes spread across the globe.

In Quaterra’s case, the assets are spread throughout North America — and they do match exactly the teaser clues from Wyatt, though the most advanced and important projects that they’re still spending on (ie, they’re not partnered or funded yet) are clearly the gold and silver prospects in Mexico and the Yerington/MacArthur copper project in Nevada. And I can see why Wyatt pitches this one as a Mexican silver idea, since that’s where much of the expertise of company management comes from — many of the folks at Quaterra came from Western Silver, which was the firm that found and did the initial work on the Penasquito mine, now a prime asset of Goldcorp and one of the biggest new mines in the world. Probably as a result, they continue to have a relationship with Goldcorp, a strategic alliance that guarantees Quaterra $10 million in funding for exploration over two years along the Penasquito Trend in “underexplored areas” which includes about a dozen prospective properties (950 square miles of land), and they also already have an unnamed 50/50 partner for their Nieves silver prospect, which is also fairly near Penasquito and has more than 50 million ounces in indicated and inferred silver resources (not “reserves”, a term that Wyatt probably uses too loosely in the teaser — assuming that the Thinkolator is right on this one).

The company seems to have some good relationships with big miners — in addition to their exploration deal with Goldcorp they have a similar-size deal with Freeport McMoran for copper exploration in the US (Arizona, Texas and Utah) … and Freeport is also an early stage partner on their Molybdenum prospect in Texas. Two smaller companies were partnering their Alaska projects, which don’t seem to be of headline-generating size at the moment (and one of those companies dropped their option last week — Copper Ridge will no longer be developing the Duke Island prospect, so that belongs solely to Quaterra again, which might be a mixed blessing if they have to spend money moving the project along).

I don’t know what the timeframe will be for any of Quaterra’s prospects, but although they do have funding partners for many of them they all appear to be in the pretty early days (though some of the properties are past-producing mines, which would theoretically speed up development). They say that this year they’re consolidating their potentially large copper district at Yerington, and continuing to drill there and at Nieves and in their Goldcorp projects in Mexico, and monitoring the progress of their joint partners (mostly Freeport, along with Grand Portage in Alaska). They released new drill results from Nieves just a couple days ago that sounded appealing, but the stock did nothing, so I’m not sure what exactly investors are expecting from Quaterra — I suspect that there are probably a good number of investors on board who have been watching pretty heavy dilution as the company has developed and acquired so many early stage properties, so it could just be that they’re waiting for something a bit more dramatic (even the Goldcorp deal brought dilution, as the $10 million in funding is through private placements of Quaterra shares).

They have about 135 million shares outstanding, and plenty of warrants and options (the options are almost all in the money) that they say give them a fully diluted share base of about 160 million shares, so at $1.60 per share the market cap is around $216 million and the fully diluted cap would be in the neighborhood of $250 million (though more cash would come in from those exercises, too). So … small, but certainly not tiny for a junior exploration company.

There are many folks out there in Gumshoe Nation who are far more expert than I in interpreting drilling results and mining resources, I can’t tell you what the current value of their potential projects might be, particularly their biggest near-term drivers at Nieves (Mexican silver) and Yerington (Nevada copper), and there isn’t an easily quantifiable asset base of royalties or cash to fall back on, so you really have to decide for yourself how to value those lead projects and their many early-stage projects that are already partnered and therefore somewhat “de-risked” (in that they don’t have to spend most of the money to move them forward … though they could easily not turn out to be economical mines).

I like the management team’s expertise and the fact that they have a bit of a pipeline of new projects to develop, and that they are at least paying lip service (recently, anyway), to the importance of minimizing cash burn and dilution this year — and I love the business model of mostly using other people’s money to do the expensive exploration, but I don’t know enough about Quaterra yet to know if I like ’em.

If you know this company or have another favorite prospect generator or similar explorer to share with us, please share a comment — there are lots of pretty successful ones that have gotten substantial investor attention in recent years, including Millrock (MRO in Canada — really tiny), Miranda Gold (MAD in Canada — also tiny), Almaden Minerals (AAU), Virginia Mines (VGQ) and Eurasian Minerals (EMX in Canada) among many others (including AuEx, which was bought by Fronteer last year). Of course, the idea of “prospect generators” probably also has gotten popular enough, with folks like Brent Cook, Matt Badiali and Lawrence Roulston all touting the concept in the last couple years, that there are probably now plenty of juniors who claim the mantle without having the key competencies of the best performers — including an aversion to stock dilution, careful financial stewardship, geological expertise, good industry connections, and, yes, luck.

Full disclosure: as noted, I own shares of Altius Minerals. I am not invested in any of the other companies mentioned above, and I will not trade in any stock mentioned above for at least three days.


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8 Comments on "“The Small Exploration Company Bankrolled by the Big Gold Players”"

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Mark
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Mark
April 5, 2011 12:26 pm

I've been to their website. They do appear to have a great set of assets. However, they are extremely vague about when any production will begin. At least, I couldn't find it specifically mentioned. Based upon my experience and what I read my guess is production in the 2013 to 2014 time frame. Personally speaking, that's too far away for me to commit money now. Others may disagree; if so I urge them to buy! Happy investing.

advantedges
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advantedges
April 5, 2011 2:31 pm

At the risk of being committal, why not just buy GLD or GG? why screw around with little dogs that get fleas? Is it because we only have 55 cents to invest? If so, stay away, you will be burned by the profiteers (Canada makes the US look like a poor stepchild in this regard when it comes to gold and natural resources).
Be careful out there with your 4 bits! Someone is always trying to take that coin away!

Rusty
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Rusty
April 5, 2011 4:42 pm
I follow QMM very closely. The chief catalyst for their stock price will likely be whether they accept the Yerington mine. They are negotiating with EPA and ARCO on this right now and word is they will accept this property soon. This will give them an enormous land position in the area and a resource containing at least several billion lbs of copper. Nieves is a silver resource that will likely reach 150 million oz. when all is said and done and would be configured as an open pit mine — thus very low cost to operate. All of the… Read more »
tom
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tom
April 5, 2011 11:36 pm
Appreciate your comments Rusty, Kinda puts the 200M+ Cap under a better light. Share structure seems neither good nor bad, so it is worth a look. Their is always a disclaimer at the end to remind you that resources are not viewed as having economic value. Its good to keep that in mind, even though we generally accept that its likely there if its professionally estimated, it definetly has some value- In this case look them up and see what evidence there is behind the numbers mentioned above. .Infrastructure, water, permits, transport all matter . This stock , if the… Read more »
Herach
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Herach
April 6, 2011 7:27 am

Investing in gold has been very good for me. I have a longtime substantial position in GG. From there I have a smaller fund for other investments. After several years of selecting winners and losers in juniors, I have turned to the ETF, gdxj. This is a Canadian ETF of junior mining stocks. It's big brother is gdx, ETF of major miners. I am comfortable with the knowledge that I will have some winners and losers in this ETF, but more knowledgable people will be making the decisions. Good digging.

JIMBOLIKA
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JIMBOLIKA
April 11, 2011 7:33 pm

AuEx which was bought by Fronteer gold was just bought up by Newmont Mining (they wanted the Long Canyon project). The deal also spun off a lot of Fronteer's other property as a new entity "PILOT GOLD"

Ventureshadow
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Ventureshadow
April 5, 2011 3:08 pm

GG and little stocks like Quaterra are in completely different businesses. If GG is analogous to putting your money in the bank, Quaterra is like buying a lottery ticket. Well, I am exaggerating but the analogy remains relevant on several levels.

Sam
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Sam
April 9, 2011 4:58 pm

I totally agree with you. There is another ETF, GLDX which you should look. However, GDXJ is performing better than GLDX, and GLDX is performing better than GDX during the upward move of gold.. I guess small miners and explorers are more speculative.

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