Yukon Gold Rush: No Place For Greenhorns

There is a modern day “Gold Rush” taking place in the Yukon. Gold and Silver in the Yukon is far from a new story, its beginnings date back to the early 1800s. The Yukon has exacted a steep price on those who would make their fortune, with its harsh lands and harsher climate. The indigenous Cholkoot Indians reportedly didn't take kindly to their land being invaded by outsiders, and defended themselves aptly. One hardy soul named George Holt braved these conditions during the 1870s and produced enough gold for others to take notice. By 1880, there were nearly 200 gold panners working the sandbars along the Yukon River.

 

As I understand it, luck had more to do with the Yukon Gold Rush than skill. A traveler (non prospector), George Washington Carmack and two Indian friends happened upon a large gold nugget nearly buried in the Klondike River. Word spread of the shear size of this nugget. By 1898, over 100,000 adventurers departed from whence they came for the Yukon to strike it rich. Sadly, only 40,000 actually survived the trip.

 

So, history repeats itself in the Yukon over a century later. In 2008, Underworld Resources reported significant mineralization on its White Gold Property. It wasn't a massive nugget, but surface gold “open” in all directions. As in the past, the ground near Dawson Creek shook as exploration companies rushed in. Intrepid claimstakers, whom had braved the downturn of gold prices in years past, finally get to rock on the front porch with a glint in their eye and potential royalties in their pocket.

 

Gold exploration continues actively in many areas spurred on by the successful exploration of the White Gold Property by Underworld Resources (now owned by Kinross). One has to ask, where did all the alluvial gold come from that was panned in the past? Is the source of this gold being closed in on? Investors with a passion for junior miners are looking for the next best story, the next junior to come up with broad intercepts, the next “ten bagger”.

 

With online brokerage accounts, many of us rushed into the Yukon along with the exploration companies. Just like the greenhorns of the past, we were/are not all seasoned prospectors. How will we choose the best company(s) ? We can search the trading communities for activity, news and advice. However these sites can be akin to sacred grounds, and like the Cholkoot, they will guard their homelands. Other investors will scour geologic maps piecing together information and doing their due diligence. They will wait patiently for surveys, drill results and the release of reports. Technical traders will diligent stare at screens watching for green arrows, omens and indicators. Regardless of your developing or preferred method, there is something that we should all spot before investing.

 

Are we looking for a Spotted Owl? No, but that may show up the permitting process. We should be shielding our eyes with a hand over brow, squinting for a glimpse of shareholder value. There simply are traits or “selection criteria” that should distinguish companies that will benefit shareholders. It is not enough for the company to turn a profit, we as shareholders must benefit also.

 

To demonstrate, I will furnish the abstracts for two companies as presented on their respective websites in 2008. Then we will dig a bit deeper, and find the cash and share structure of each company. In illustrating differences in how these companies progressed from 2008 until now, hopefully this will provide investors with clues to let them separate the “pretenders” from the “contenders”. Before introducing the two companies, a disclaimer: I have owned shares of both as various times. I present to you, the abstracts for Klondike Silver and Strategic Metals.

 

Screening:

 

Klondike Silver Corp has assembled a portfolio of properties in historic mineral districts in North America, and is applying advanced exploration technologies to add value to these core assets. Klondike Silver is reviving the Gowganda and Elk Lake silver camps in Ontario, and the world-famous Klondike district of Yukon Territory. The Company owns a 100 TPD (“tons per day”) fully operational flotation-mill in Sandon, BC, which is currently processing material from one of its Yukon properties, and local mines in the historic Slocan Silver Camp. Klondike Silver is a member of the Hughes Exploration Group of Companies.  It is listed on the Toronto Venture Exchange under the symbol KS.V and “pink-sheets” under the symbol KLSVF.PK. Its share price for the fall of 2009 ranged from .05-.09.

 

Discussion: At first glance, we see that they are both producing silver and exploring new properties. How profitable the silver milling operation is needs to be investigated. They have several prospective properties, some of which are in the Yukon. They were sitting at 6 cents with S/O at 73 million when I listed them in our Mining Database (Klondike Silver.) a couple of years ago. They had over $1 million in cash and equivalents, and had lost (.01) diluted in the last quarter early 2009. This appeared to be a prospective company, with holdings in a hot area. While being a junior silver producer, is holds lands with both gold and silver potentially.

 

Strategic Metals Ltd. is a junior mining company specializing in generative exploration in northwestern Canada. Its business model entails acquiring quality prospects, advancing them to drill stage and then arranging an option or outright sale. This generative model is designed to minimize shareholder dilution while maximizing exploration expenditures and the probability of success.  Strategic Metals is listed on the Toronto Venture Exchange under the symbol (SMD) and OTC under the symbol (SMDZF). The stock price was ranging from .30-.50 in the fall of 2009.

 

Discussion: While screening the company we find they are a prospect-generator. They do the background research on properties to determine what work or resources have been established in the past. They proceed to do rock chip sampling, overhead surveys, “trenching” and limited drilling to outline/update mineralization on the properties. They generate capital by optioning properties to other exploration companies. They occasionally advance some of the properties themselves through more extensive drilling. They were trading around 40 cents, with 57.6 M shares out with $15 Million in cash for year-end 2008.

 

Selection:

 

Now we peer through the lens of our selection criteria. Before investing it is critical to establish the fully diluted share structure and determine the cash available. Most often these numbers are up-to-date in annual, or quarterly financial reports. The investors' section of the website may be outdated. Without these data, we truly don't know what we are hitching our team to.

 

Klondike Silver Share Structure and Cash: For year-end 2008, S/O was 73 Million, which is not excessively diluted. Warrants 7 Mill, flow through shares for year -end 2008 15 Mil and non-flow through share at 2M for a fully diluted total of 92M. One warning flag however, as we read into the financials: there are many properties they are buying into, contingent upon releasing addition shares at various periods. Cash and equivalents for year-end 2008 were @ $1.3 Million. For the number of projects they were taking on, this appeared low.

 

We now fast forward to more current share structure and cash:

28 Apr 2010

Issued 186,228,085

Warrants 115,734,232

Options 17,178,500

Fully Diluted 320,190,817

Cash 347,008

 

Discussion: Indeed, they did release a good many shares in the form of warrants. They needed to raise cash for operations and exploration. There are a hefty amount of warrants overhanging. They are still cash light, at $347K. Unfortunately, the share price is sideways trading between .03-.05. Corporate is having trouble raising capital for exploration without releasing a tidal wave of shares. There is potential for consolidation, and a reverse split to lower that share structure, and increase the likelihood of raising cash. They are still sitting on prospective lands, but exploration is not robust, and there hasn't been a news release in several months.

 

Strategic Metals Share Structure and Cash: For year-end 2008, Strategic Metals had 57,616,725 S/O and another 12M in warrants @ 1.16 expiry Aug 2009 and 4M Options outstanding for 72.5 million fully diluted. They had cash and equivalents of $15.8 million. This represents a good share structure and solid cash position. Now we view the current capitalization.

 

Share Capital and Cash 2010:

Issued 66,639.226

Options 5,750,000

Warrants 0.0

Fully diluted 72,389,226

Cash 28,449,628

 

Discussion: Strategic Metals had a strong balance sheet and share structure in 2008. They in fact did a share buy-back that year (unusual for a “junior explorer”), lowering the shares outstanding. The 2008 trading range was .30 to .50 cents. Viewed currently, they are showing no further dilution. They have strengthened the cash available through business ventures such as optioning properties. In doing so, they have both accumulate cash, and also a portfolio of metal and mining company stock from their business partners. Robust exploration is ongoing by both JV partners and their own organic teams. They are currently trading in the 2.90-3.30 dollar range.

 

While the Yukon Gold Rush is on yet again, modern day explorers are searching for the “mother load.” As investors and potential shareholders, we should be searching for value, seeking the companies that will generate profit. We cannot afford to be “greenhorns” for long. Regardless of how big the land package, or how prospective the parcels are, it's important to monitor the mundane first.

 

Business acumen, JV partners and significant cash in hand offers the possibility for claims to become trends. Diluted share structures and cash starved companies cannot drill, generate little news and few seminal events. They sideways trade at best. Just like the gold rush of the past, only 40,000 of the 100,000 brave souls ever reached the Yukon, let alone found gold. If we hitch our venture capital to poorly managed companies, the Yukon will be rough on us too.