The Gold Report recently interviewed John Tumazos, principal and
founder of John Tumazos Very Independent Research LLC. Mr. Tumazos discussed
the Duluth Complex, a polymetallic mining district in Minnesota, and the five
companies that comprise the Complex. Mr. Tumazos has been recognized as a top
analyst 42 times in the annual Institutional Investor survey for metals,
which is regarded by many to be the most comprehensive survey for Wall Street
analysts.
TGR: Let’s begin with the Duluth Complex,
the world class, polymetallic mining district in Minnesota. How many companies
are involved with the Complex?
TGR: What percentage of the Complex does Duluth
Metals own?
JT: It owns about 30%. The company recently
announced new resources there. There are now`15.2 million ounces in precious
metals; 3.15 billion pounds of nickel; 10.2 billion pounds of copper; and 167
million pounds of cobalt. Duluth Metals doesn’t measure silver, rhodium
or ruthenium.
TGR: Are you currently recommending Duluth
Metals?
JT: I have an overweight or a buy on Duluth
Metals, PolyMet Mining and Teck Cominco. I don’t currently have a
recommendation on Franconia Minerals, but I’ve written on the company,
and I did host Franconia at my conference on March 27, and invited the
company back for next year.
TGR: What prices are you using when you
estimate the value of these companies’ resources?
JT: I use $9 nickel; $3.25 copper; $12 cobalt;
$1500 platinum; $350 palladium; $850 gold. These are obviously lower than the
current market prices, but they’re within 10%, with a few exceptions.
For palladium, it’s maybe 15%; for cobalt, it’s less than
one-third the market, and for platinum, it’s about 80% of the market.
Gold is at $883 right now, so I am at a $33 discount for gold.
TGR: Why such a big discount on cobalt?
JT: Because there are a number of nickel and
copper mines that will produce a lot of cobalt.
TGR: All right. Turning now to PolyMet Mining,
this company has completed a feasibility study and is seeking an
environmental and operational permit to start commercial production in the
second half of 2008. What’s the status of those permits?
JT: I understand that in June, the state
agency is going to publish the draft of the Environmental Impact Statement,
which will be followed by a comment period and revisions. So it seems to be
moving along.
TGR: If PolyMet gets the permit, what does that
mean for some of the other companies, particularly Duluth Metals?
JT: PolyMet and Teck Cominco are adjacent to
one other, west to east, so the assets of those two are like a pair. . . so
that operationally, Teck Cominco and PolyMet are a natural pair, and Duluth
and Franconia are a natural pair.
TGR: A natural pair, in the sense that it would
be logical to combine their operations for greater efficiency?
JT: Yes, plus it would mean a lower
environmental footprint. What’s best for the economics happens to also
be best for the environment in this case. I think that Duluth is the easiest
project of the four.
TGR: Do you mean with regard to the
fundamentals?
JT: Duluth Minerals is the only one of the
five companies that has no open pit. It also has a single block of
high-grade, underground ore. So, you don’t have stripping and you can
put most of the waste back into the mine as backfill. Duluth also has two to
three times higher grades than PolyMet. I think what Duluth has is better ore
or better rock than PolyMet or Franconia, whose disclosures are current. Teck
Cominco has not made a detailed disclosure. The most recent information we
have for the company comes from prior owners of the property, and that
information is 30 to 40 years old.
TGR: So how do the three companies whose
disclosures are current compare with each other?
JT: Franconia has three underground pods each
containing 100 million tons of ores. Duluth has one pod with 733 million
tons, and counting. So, it’s much bigger and it’s also all one
pod, whereas Franconia ended up with three shafts, or three sets of workings,
because the pods are three or four miles apart.
TGR: What about PolyMet?
JT: PolyMet is all open pit with relatively
lean ore content—.08 nickel, .027 copper, and a third of a gram of
precious metals. Overall, PolyMet’s material is one-third to one-half
as rich as Duluth’s. PolyMet has fewer tons and a lesser grade.
TGR: In a recent seminar, you talked about
these companies combining their efforts. Could you elaborate on that?
JT: I think several of the companies should
combine to reduce what they spend on environmental consultants and on
metallurgical testing and engineers. For example, each of them is going to
have a very similar hydrometallurgical (Platsol) recovery plant. It should be
one design with three carbon copies, or just one big plant.
All of these companies are using the
same recovery process. So there is a great deal of duplication of permitting,
engineering, design, and then there’s construction capital and
operating capital. And every time you have a duplicate building, it is a
duplicate environmental footprint. In the case of Franconia and Duluth, they
should at least share a shaft – an interlocking infrastructure would be
much safer.
TGR: So why hasn’t there been more
collaboration?
JT: It isn’t clear that Teck Cominco is
of the same mind as the others. The other three public companies are each
using the same metallurgical process from a company in Toronto. Teck has its
own autoclave system it calls "Seesaw." The other three companies
claim their process recovers platinum group metals while Teck’s
doesn’t. And Teck claims that all of the other properties have poor
metallurgical recoveries. I get the feeling that Teck may have fewer
resources because the company uses its own process, and doesn’t look
outside. However, there have been lab tests that have verified the recoveries
of all three of these companies on the ores. So I’m inclined to believe
the three independent companies, and that Teck Cominco is suffering from a
“not-invented here” syndrome.
TGR: Do you think Teck will eventually be
swayed?
JT: I expect the company will not move
forward. I don’t know if it will just hold onto its claims, or drop
them. But Teck has many other projects throughout the world. It’s a
large, complicated company. Its oil sands are very exciting and the biggest
consumer of funds in the company.
TGR: Would it make sense for the other three to
come together?
JT: It would be easiest for Franconia and
Duluth to come together because their properties adjoin each other. PolyMet
is 15-20 miles south.
TGR: But PolyMet has a mill.
JT: The mill has no value to the other two. It
would be useful to Teck, because its property is adjacent to PolyMet’s.
But I think if you’re dealing in tens of thousands of tons a day, 15 to
20 miles is too far to travel.
TGR: Do you think Duluth Minerals and PolyMet
will build their own mill?
JT: That’s what I would expect. Teck
would be in a better position to share PolyMet’s infrastructure if it
wanted to.
TGR: When you initiated coverage on Duluth
Minerals, you came up with a $15 stock price. Could you summarize how you
arrived at that price?
JT: I estimate that Duluth can spend a $1.5
billion to build 40,000 tons a day, and institute a dividend in 2018 when it
goes from $20 to $40 and pays off 10% debt in 2019 and half a billion in cash
in 2020 year end. And I estimate that from 2018 on, it’s trading at
little more than $2 a share, which I think would be worth $30. So, I am
saying $15.
TGR: And last but not least, what milestones
will have to be met to take us to this $15 level?
JT: Duluth will probably double its resources
over the next several years. That may not be a milestone, because the company
already has plenty of ore. The first milestone would be if the company were
to delineate high-grade pockets that could get a quick payback. On June 4,
Duluth defined 17-20 million metric ton zone that was 25% richer than the
average ore.
And on April 2, the company announced
it had intersected a new footwall zone of higher grade mineralization in the
Giants Range Batholith below the lower contact of the Duluth Complex where
the main Nokomis copper-nickel-PGE mineralization is situated, beneath the
zones it called the “Footwall.” That looked like it could have
been 50% richer. So, the first milestone would be in my opinion defining some
high-grade areas that could give the company a quick payback or quicker than
2019. Maybe it’s possible to shave one or two years off of that.
The second milestone would be to
complete environmental permits, which isn’t possible until 2010 at the
earliest because the company needs two years for baseline data collection,
and then it has to have a final mine design. It also has to have a year or so
to draft FDIS and comments and finalize it.
TGR: And the third milestone?
JT: The third would be financing, principally
a $900 hundred million dollar series 10% or so bonds. The fourth would be
completing construction. The fifth would be producing one year at the first
phase of design.
TGR: That puts us at 2015 by the time Duluth is
in production, right?
JT: I figure the company is in production in
2013.
TGR: Yes, exactly, and the price isn’t
going to be $15 then, either.
JT: I can hope.
TGR: One could only hope, but, of course, these
markets make us wonder sometimes.
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