By Peter Epstein, CFA - @peterepstein2 of Epstein Research

Impressive De-risking and Growth Announced by Falco Resources

On February 10th, Falco Resources (FPC.V) (FPRGF) provided a roadmap for 2015. Not only is the company advancing its work on its flagship Horne Au-Ag-Cu-Zn project in Quebec, it has officially announced an aggressive drilling campaign with a budget of $3.7 million. The Horne Project area encompasses the former producing Horne and Quemont mines as well as the Horne 5 deposit. The Horne mine was operated by Noranda from 1927 to 1976 and produced 11.6 million ounces of gold and 2.5 billion pounds of copper. The Quemont mine is located 600 metres north of Horne and produced approximately 2 million ounces of gold and 400 million pounds of copper between 1949 and 1971. The Horne 5 deposit lies immediately below the historical Horne mine.

Together, Horne and Horne 5 share many similarities to Agnico-Eagle's (AEM) La Ronde mine located 40 kilometres to the east. Those orebodies are dynamic multi-metallic systems that remain open, plunging steeply to depth for several kilometers. How many juniors can one name spending $3.7 million on drilling alone? By the time initial metallurgy results come back at mid-year, a lot of juniors could be out of business, unable to afford the annual audit fees. Last I checked, auditors don’t accept shares in the companies they audit. Recall from prior articles I’ve written [Here] & [Here] that Falco essentially inherited a 2.8 million gold equivalent Inferred resource due to an extensive database containing roughly 80 years of Noranda’s exploration, development and production records on 14 past-producing mines.

Up to 5 Million Gold Equivalent Ounces by Year-End Could be a Game-Changer

This Inferred resource was delineated without a single drill hole by Falco and supports management’s ambitious plans to book up to 5 million gold equivalent ounces in the NI 43-101 categories of Indicated & Inferred in the 4th quarter. A takeaway from the February 10th press release is a reminder that the company is fully funded through 2015. Even if one does not actively support a takeout thesis, the value creation and de-risking from achieving 2015’s stated corporate initiatives could be a meaningful catalyst for the stock price. Comparing Falco’s exploration project to that of neighboring mines, 2 out of 3 analog mines (Agnico-Eagle’s Goldex and AuRico’s (AUQ) Young Davidson) have considerably lower ore grades and less than Falco’s projected 5 million ounces of gold equivalent resources.

Although there was no groundbreaking news in Falco’s corporate update, I believe that it’s not only helpful for investors, but also for prospective acquirers of Falco. The initial results of metallurgy testing to establish recoveries for Au, Ag, Cu, and Zn due by mid-year, could be as important a catalyst as the next NI 43-101 resource update. Why? Because potential suitors need to check off a number of boxes before they get really interested. Some of those boxes may already have been checked, most notably that the company’s property being in an excellent jurisdiction with substantial access to infrastructure / labor and Falco having tremendous exploration upside outside the Horne land holdings.

Of course, suitors start kicking tires at different stages. However, I would not be surprised if some potential acquirers are already doing due diligence, or at least following Falco’s progress quite closely. Yet, I don’t believe that Falco’s shares are trading at a premium due to a possible takeout scenario. Falco’s stock at $0.54, is up 12.5% from the news of Osisko Gold Royalties (OKSKF) wielding a more aggressive stance with its ownership of 10mm + shares, and Osisko raising $200 million to refinance its credit facility, thereby maintaining a sizable war chest. Please recall that Falco controls the last, and a giant property in the Abitibi Greenstone Belt. Yet, a 12.5% gain on the then $40 million market cap equates to roughly a $5 million valuation uptick for a well funded company that could be worth well over $100 million within 12-18 months.

Without belaboring my takeout thesis, which again can be found [Here], it seems undeniable that Falco is becoming more and more valuable as some of the key de-risking events outlined in the February 10th press release come to pass. Of course, management has to execute by hitting their exploration and metallurgy testing milestones, but the company is lucky to have a top-tier management team and Board. The profile of the Board and management teams is unlike most junior mining companies, as it’s made up of people who have built and operated some of the most successful mines in the Abitibi, including Agnico-Eagle, AuRico Gold and Osisko Gold Royalties. It’s a real tribute to the quality of Falco’s asset base that it has been able to attract this magnitude of relevant and extensive experience. I recognize of course that every junior miner on the planet says that they have a strong management team. Therefore, I invite readers to make their own determination by clicking [here] for more details.

Remember, this is a company with a market cap of about $C50 million, a drop in the bucket for peer Abitibi Greenstone Belt players like Goldcorp (GG), Agnico, Yamana (AUY), Hecla (HL) and AuRico. Sometimes larger companies acquire an attractive, long-dated call option on the price of gold for themselves and/or to block that call option from falling into the hands of peers. If Falco can execute, there could be competitive tension among suitors such that multiple parties become interested in Falco’s assets later this year. Okay, now admit I am belaboring my takeout thesis!

Switching gears, questions that I’ve been asked subsequent to my latest articles sometimes revolve around the assumption that 1) Noranda already mined the low hanging fruit and that 2) subsequent companies had opportunities to mine after Noranda did, but decided to pass. It’s very important to remember that Noranda was a copper producer, and they built a large copper smelting complex in Rouyn-Noranda in the 1920s. The mandate of the Company was to feed copper to the smelter. Gold was not important and was only produced as a byproduct of copper production.

Despite never being a focus, the camp produced 19 million ounces of gold (along with almost 3 billion pounds of copper) making it amongst the most prolific gold camps in the Abitibi during the 50-year operating life of the Horne mine from 1927-1976. With consolidated property, a strong management and Board, $12 million in cash, a tremendously valuable database and enhanced modern exploration and development technologies, I believe that Falco’s ambitious goal of ending the year with up to 5 million NI 43-101 compliant gold equivalent ounces is not as lofty a goal as some might suspect. Promising initial metallurgy results would be a welcome event as well. Near term catalysts are the release of assays, the metallurgy testing, finishing drilling in 3q 2015 and of course an updated NI 43-101 resource report. I remain very bullish on Falco Resources and strongly recommend that prospective investors review the company's corporate presentation and recentpress releases.