VANCOUVER — The market landscape has shifted notably for juniors with exploration stage assets. And though equity markets remain tough, it has opened up opportunities for producers, like U.S.-based Hecla Mining (NYSE: HL), that are looking to get involved early in projects and jurisdictions that could eventually turn into new mines.
The business model is not necessarily a new one, but it is being highlighted by limited equity opportunities and the need for production oriented companies to preserve cash and focus more on a core asset base. As valuations on early stage projects have dropped, miners like Hecla are looking towards share based investments in juniors that present an opportunity to enhance development pipelines, while limiting the need to spend valuable capital on exploration initiatives.
“It's a strategy we've actually been entertaining and thinking about for a number of years, but it wasn't something we actively participated in until around eighteen months ago,” comments senior VP of exploration, Dr. Dean McDonald, during an interview at Hecla’s Vancouver offices.
“There were a lot of things we thought had potential out there, and when we started looking at the valuations it started to make sense. Three years ago I would have said the exact opposite. Why would you invest when these types of junior deals are over blown. You could take the Yukon plays over the past few years as examples. Some of the market capitalizations on early stage exploration just did not add up,” he continues.
And that newly instituted strategy has seen Hecla invest roughly US$8 million in a trio of junior explorers over the past twelve months. McDonald explains that the recent rash of write downs and project delays amongst producers — he cites Barrick Gold's (TSX: ABX; NYSE: ABX) Pascua-Lama project on the border of Chile and Argentina as an extreme example — has changed the way markets view growth pipelines. Whereas investors were strongly focused on near term expansion via asset acquisition over the past few years, it is now shifting to more discretionary growth by way of exploration and measured development.
“We've always been very in tune with the market. We didn't necessarily start with an active list of projects, but we've always been evaluating these opportunities on a case-by-case basis,” adds VP of corporate development Don Poirier. “As mentioned the market plays a big role in these types of investments. We didn't want to run these programs ourselves, but we saw a lot of value in the expertise of some of these management groups. As the markets came down we saw people with quality projects and no access to capital or equity markets, so we started looking at providing those life lines.”
Hecla's initial foray into the junior sphere came back in Aug. 2012, when it invested around US$3.2 million in Vancouver-based Dolly Varden Silver (TSXV: DV), which is exploring a historic silver area in the upper Kitsault Valley, where Barrick mined the Eskay Creek volcanogenic massive sulfide (VMS) deposit for gold, silver, copper, and zinc through 2008. Hecla purchased 20 million shares in Dolly Varden at a price of 16¢ per share, which resulted in the producer owning around a 20% equity stake in the company.
McDonald adds that he did his doctorate thesis on the long running Silbak Premier epithermal mine in the district, and that the Eskay Creek belt has always intrigued him with what he refers to as "huge geological potential." The capital has allowed Dolly Varden to conduct a pair of drill programs, while also rehabilitating the historic Torbrit underground silver mine.
Dolly Varden is focusing on a structural model at the project, with field work during 2013 identifying a long lived fault system, which potentially acted as a hydrothermal conduit for the various phases of silver mineralization, including a late stage introduction of native silver that resulted in some of the highest grade silver mineralization at Torbrit.
On Nov. 8 Dolly Varden released results from a 10-hole program at the project that targeted the DVT exhalite horizon at Torbrit. Highlights from the assay set include: 11.5 metres grading 674 g/t Ag, 0.41% Pb, and 0.48% Zn from 211 metres depth in hole 13-14; 7.7 metres averaging 621 g/t Ag, 0.7% Pb, and 0.11% Zn from 124 metres in hole 13-06; and 17.2 metres of 155 g/t Ag, 1.4% Pb, and 1.65% Zn from 154 metres in hole 13-11.
“I'd always heard of the Dolly Varden, though I hadn't looked at it too closely. I now understand that due to rather questionable ownership it really did not advance during that initial Eskay rush,” McDonald continues. “We actually knew the principles in the company, and when we saw they had picked it up I was really excited about that project.”
Hecla's next strategic move was a US$2.5 million investment in Canamex Resources (TSXV: CSQ) in Nov. 2012, which is primarily focused on earning 100% ownership in the historic Bruner gold-silver project, located around 72 km northwest of Kinross Gold's (TSX: K; NYSE: KGC) Round Mountain open pit mine. Hecla picked up around 14 million shares of Canamex at 18¢ per share for a 14.8% stake in the company.
McDonald adds that Hecla is not too restrained by deposit type or commodity. He points out that the company works with VMS deposits at its wholly owned Green Creek silver mine in southeastern Alaska, fissure-vein type mineralization at its Lucky Friday silver mine in the Coeur d’Alene mining district in northern Idaho, and epithermal deposits at its development-stage San Sebastian silver project in Durango, Mexico. The company also waded into Archaean greenstone belts with its recent US$796-million acquisition of Aurizon Mines and its Casa Berardi gold operation in Quebec.
“The only thing we haven't done thus far is a porphyry deposit, so I don't think we fall into one category in a geological sense,” McDonald continues, adding that geographically Hecla prefers jurisdictions in the Americas. “Our focus has typically been narrow vein mining in underground scenarios. I mean, over the history of the company we've had open pit mines that have been successful, but we do see our key areas as being underground.”
Hecla's most recent investment saw the company take an interest in another historic silver project in northern British Columbia. In late February the company announced it had subscribed for 17.25 million shares in Vancouver-based Brixton Metals (TSXV: BBB), which is exploring its Thorn polymetallic project 130 km southeast of Atlin. Hecla ended up with around a 20% equity interest in Brixton, while the junior received a US$2.6 million influx of cash.
The investment followed a series of high grade intervals at Thorn's Oban breccia zone, which included 95 metres grading 904 g/t AgEq from surface in hole 11-60, and 123 metres averaging 406 g/t AgEq from 44 metres depth in hole 12-84.
Hecla's investment funded 4,600 metres of drilling for Brixton in 2013. The company released results in late August, which featured additional high grade intervals, highlighted by 1.31 metres of 1,275 g/t AgEq from surface in hole 13-101. As a result Brixton raised another US$1 million from mining financier Rob McEwen in early October — while Hecla pitched in another US$426,000 — which allowed the junior to get its drill back in the field before the end of the season.
“All of us are aware of what's going on in terms of new stories and discoveries. People move around this business, and our team has a lot of experience in the industry. You tend to identify the good people, and come to know who manages companies well,” McDonald adds. “At that point the ingredient was: ‘Did they have a property, though it may have been early stage, which had the potential to be a mine.’ The basis of what we're tryin g to do is put ourselves in a position where we're knowledgeable about it, and that it fits our criteria.”
And according to McDonald and Poirier the search for promising junior investment will continue for Hecla. The company is focused on preserving its operating cash flows so it can fund growth and development internally, while maintaining a strong balance sheet. Hecla registered cash flows of negative US$5.2 million during the third quarter, and reported cash and equivalents totalling US$238 million at the end of September.
The company has traded within a 52-week window of $2.65 and $6.15, and closed at $3.04 per share at the time of writing. Hecla maintains 343 million shares outstanding for a $1.05 billion press time market capitalization.
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