Wednesday 17 January 2018

ML Gold following the Garibaldi model, but without the egregious market cap

I was tied up with a financing and not on top of the news, so I missed it last week when ML Gold (TSXV:MGL) announced that drilling at its Stars Property in central BC intersected 311 metres with visible chalcopyrite mineralization (link).  Thanks to reader DH for bringing this to my attention.

So, once again we have a junior mining company announcing a new discovery prior to releasing assay results.  Garibaldi Resources (TSXV:GGI) demonstrated last year how to send your share price skyrocketing this way without any assay results.  In my opinion, GGI over promised and under delivered, although the best example of failing to live up to the hype was New Nadina (TSXV:NNA).  That stock crashed in spectacular fashion at the beginning of 2018.  Somewhere out there is some poor sucker who paid $4.50 for NNA shares, which are now trading at $0.41.  Ouch!

While there are similarities between MLG and GGI, a big difference is that MLG is trading at a market cap of $19M while I was criticizing GGI when it had a market cap north of $300M.  Making money is all about risk-reward and taking on high risk only makes sense when justified by a high reward.  MLG shares are trading at $0.23. If the 311 metres of copper mineralization at the Stars Property doesn't amount to a major discovery, which is the most likely outcome based on geological probabilities, MLG shares could very well go back to $0.10 and you'll lose more than half of your investment.  However, in the rare event that this is a real discovery, then the stock could go up tenfold to $2.  This, in other words, is a classic junior mining lottery ticket - the odds are that you'll lose your money, but you have a chance of winning big if you get lucky.

Even when buying a lottery ticket, I like to get the odds on my side as much as possible and to make sure that I'm not getting hoodwinked.  So, I did a little bit of due diligence on this project.  The Stars Property is in a porphyry belt and is situated 58km north of Imperial Metals' Huckleberry Cu-Au-Ag mine.  That is a good sign, although Huckleberry is currently on care and maintenance waiting for higher copper prices (in other words, grades are low and/or costs are high).  The two main targets at Stars have geophysical anomalies and soil samples confirm the presence of copper and moly at surface, especially in "Zone B".  According to the ML Gold website, there have been historic shallow holes that have ended in copper mineralization, including hole CS-02 which ended in mineralization grading 0.56% Cu at 110m.

Hole CS-02 piqued my interest, so I dug a little more and found a technical report dating back to 2002 by Doublestar Resources (link).  As is often the case in the junior mining sector, MLG has cherry picked the good information from the historical drilling and neglected to mention other material information that is not quite as rosy....
Hole CS-02 was the only good hole.  The others were all sub 0.1% Cu mineralization, which is also known as "waste."

 To be fair, this report was from 2002 when copper was trading at around $0.70/lb.  Plus, there was a glimmer of hope in the 2002 report, as follows:

In the current market environment where investors clearly like to speculate on potential discoveries, my initial sense was that MLG is probably worth a trade.  Liquidity is good and a sniff of some decent grade copper should send the share price higher.  But only stay in as long as results are good.  As seen with Golden Predator, GT Gold, Garibaldi, and Novo, the speculative froth doesn't last too long.

One of the reasons for my hesitancy in jumping on the MLG bandwagon is that I have a decent sized position in AbraPlata Resource (TSXV:ABRA), which has a similar size market cap as MLG (I also work as a consultant for ABRA, so consider me biased!).  In my opinion, ABRA has better looking porphyry targets than MLG.  More importantly, ABRA has more value in the event that the porphyry targets are duds, as it has a silver-gold project with an Indicated resource (pit constrained) containing a hefty 81 million ounces of silver and 755,000 ounces of gold (140 million AgEq ounces or 1.8 million AuEq ounces).  MLG also has a gold-silver project in Nevada, but it only has an Inferred resource (pit constrained) resource containing 310,000 ounces of gold and 2.4 million ounces of silver (341koz AuEq). 

After doing a bit more research, however, I realized that MLG also has a very large iron ore project in northern Quebec.  As it turns out, MLG used to be known as Cap-Ex Iron Ore and the stock traded north of $6 back in 2011 (see 10-year chart below).  I made the connection to Cap-Ex Iron Ore because MLG still shows the research coverage they used to have on their website, which is rather nostalgic. 

All in all, MLG looks interesting for a speculative trade on the Stars property and I plan on taking a position.  The company has some other decent looking assets, so there is some downside protection in the (likely) event that the copper mineralization is either low grade or confined to a small area.  I'll try to get some more insight into the company plans and will also see if I can get some technical insights from geologists on the porphyry potential at Stars.  Happy trading!

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