Smashing, Baby!

April 26th, 2011 David Zurbuchen

To those who follow the Yukon mining scene, it’s old news that Smash Minerals (TSX-V: SSH, Stock Forum) began trading on April 4th after an IPO raised $6.4 million at 80 cents. Unfortunately for us, the deal wasn’t available to participants from the United States. Unfortunately for the non-Americans among you, we haven’t set up the required details to discuss special situations like this in a semi-open forum such as Metal Augmentor. In any case, the IPO was heavily oversubscribed so participation would have been difficult regardless.

Be that as it may, we couldn’t resist the opportunity to pick up a few shares on the first trading day in the low 90 cent range as the brokers flipped a portion of their position to create the initial public float. That first day’s trading volume remains by far the highest in the company’s short trading history, but the situation is deceptive: any aggressive attempt to pick up more than a few thousand shares would probably have caused all the “asks” to be taken out with the result being an extreme trading range on the opening day. As it happened, the trading was quite orderly not only on that first day but during the past 3 weeks as well. Despite the orderliness, it remains the case that the shares are extremely illiquid and therefore undisciplined buying will likely result in paying way too much. Therefore the situation is still not very ripe for the buying and we only bring it up now in case the shares catch a draft as the Yukon exploration season gets under way.

Let’s be realistic: it’s probably unlikely that Smash will trade anywhere near the 80 cent IPO price in the short term — even during a summer pullback and perhaps even during significant weakness in the gold price. So it is probably unreasonable to hold out for a true bargain here. Rather, a practical goal might be to initiate a position near the $1 level with more buying to follow if the price remains near or below the initial trade. If given the opportunity, we personally would be quite willing to buy more below the $1 level. In the intermediate term, an uneventful first season of exploration may yet provide the opportunity to increase position size at a price even below the IPO. It certainly wouldn’t be a surprise or the first time it happened.

The Basics

Smash Minerals is run by Adrian Fleming of Underworld Resources fame who seeks to make a similar discovery in the same White Gold district where Kinross Gold made its “impetuous” buyout of the Golden Saddle deposit (impetuous because it can so early after the discovery). With just over C$6 million raised from the IPO, Smash’s enterprise value works out to about C$14 million. Considering the valuations afforded to many Yukon plays (a number of which will not even drill this year), this is quite reasonable for what basically amounts to a virgin exploration play.

That said, Smash has something that virtually none of the others have — a head honcho who has actually discovered a gold deposit of merit in the very same district where he is now set to explore again. We don’t want to get carried away at this point, but with a little luck Smash could become absolutely “shagadelic”. The catch is that it is going to take a couple of years — perhaps three in the worst case — of exhaustive exploration to determine if Smash’s ground does in fact contain a gold deposit. Therefore anyone buying at this early stage should be prepared to wait it out in order to get the biggest potential reward– we certainly are. Of course there’s always the potential for an interim spike where profit taking might be in order but we are highly inclined to see this one through to discovery or bust. As you might already know, we don’t often get involved with early-stage story stocks — but if we are going to do it then it shall be bold and right.

The Details

Adrian Fleming was eager to expand Underworld’s land package in the White Gold district even before making the Golden Saddle discovery. He kept in close contact with Shawn Ryan and Cathy Wood, the husband-wife prospector team who single-handedly caused the new Yukon gold rush. Ryanwood had already sampled the area and staked much of the prospective ground — for example, the Coffee property vended to Kaminak. Underworld added the adjoining JP Ross claim toward the end of the 2009 field season, but despite Mr. Fleming’s eagerness, Mr. Ryan held out on other prospective claims in the camp. It turns out that he was hoping to vend them to a new company with him and Mr. Fleming as partners so as to increase their leverage to success, like any good businessman would do. Alas, such an arrangement would not be possible while Mr. Fleming still served as President of Underworld. The problem, however, was soon resolved by the aforementioned Kinross buyout.

With Underworld out of the way in early 2010, Mr. Fleming and Ryanwood got together with the intention of making lightning strike in the same place twice. They quickly put together the last remaining prospective ground in the district — several hundred square kilometers to the north and east of Underworld’s original claims (including immediately east of the JP Ross claims) as the map below shows. These were to be the last blocks of bona fide prospective ground in the area play . . . most of the other claims being allegedly staked in the White Gold district do not actually have White Gold geology.

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In any case, there was no time to waste with the short Yukon summer in full swing and the team immediately got busy with a program of mapping, prospecting and soil sampling. With a huge amount of ground to cover, the initial effort was selective and included ridge and spur sampling . Despite this, several of the assays revealed some nice “smoke” with similarities to the Gold Saddle discovery and this gave Mr. Fleming the confidence to proceed with the Smash Minerals IPO in order to raise a boatload of money for a comprehensive exploration program.

The initial program also allowed the exploration team to identify and stake additional open ground. Two high priority targets were noted for follow up in the north block and one in the east block. The current year’s exploration program will include more soil sampling on a tighter grid, helicopter-borne geophysics, additional prospecting and geological interpretations in order to target a Phase 1 drill program using 2 rigs (already reserved).

Smash has also acquired an expensive bench X-ray fluorescence spectrometer in order to pre-screen soil samples on site to better help guide the program. Although the device probably does not have a low-enough detection threshold for the gold grades expected to be encountered in soil (under 15 grams per tonne), it can detect indicator metals such as tungsten, molybdenum, arsenic and antimony. These indicator metals have already been identified on Smash ground in previous sampling programs and encouragingly they can also be found at both the Golden Saddle and Coffee discoveries.

The Smash team expects to spend two summers sampling, prospecting and drilling with the goal obviously being a major discovery of gold at the earliest possible opportunity. The land package is large enough that certainly the first field season will not be sufficient to get a complete handle on the prospects. It strikes us, however, the Mr. Fleming is not the type to pursue diminishing returns and therefore we don’t believe he will tarry should the claims fail to yield gold despite the best efforts to find it.

Notably, Kinross has apparently had quite a bit of success expanding the original Golden Saddle discovery since acquiring Underworld. As stated in its recent financial update, Kinross plans to continue exploring the project aggressively during the upcoming field season. They may be trying to reach a 3 million ounce threshold before making a mine construction decision:

Other key initiatives in 2011 include Fort Knox ($8 million), Chirano ($8 million) and White Gold ($7 million). Over 14,000 metres of drilling is planned at White Gold focusing on key targets at Golden Saddle, Arc and McKinnon. Continuation of district wide geochemical sampling and mapping is planned to identify new targets and to better understand the potential scale of the mineralized system.

As far as the Yukon area play in general, there probably needs to be a new discovery made this summer or most of the companies stand to drop significantly in market value from their current lofty levels. If nothing else, Kaminak at the Coffee property and ATAC Resources at its Nadaleen project should keep the market tense with dreams of Yukon gold on its mind. Other than Underworld’s Golden Saddle discovery, it is arguably the Coffee property that serves as the closest analogy for what Smash is trying to achieve: bulk tonnage gold near surface with a grade ~1 gram per tonne and/or underground gold with narrower intervals grading +3 gram per tonne. Similarities between the Smash ground and Coffee/Golden Saddle geology, structural setting (primary northwest faults and secondary east-west faults that are hopefully mineralized) and indicator minerals provide encouragement.

Notably, Smash should have a 30 person camp mobilized by early May before starting additional prospecting, mapping and rock/soil sampling. Next will follow tighter grid-based soil sampling and then helicopter geophysics. Trenching is expected to begin mid-June followed by core drilling in early August. The expectation is to drill about 20 holes before freeze-up in early October. This schedule doesn’t leave much room for pauses in news flow and we expect the shares to start coming to life as the season progresses.

Bottom line, Smash Minerals is a pure exploration story that could have a significant future ahead of it. Like any good story stock, there is 10 bagger potential in the longer term if a gold discovery can in fact be made. It’s risky and nowhere near a sure thing but Mr. Fleming’s involvement, a tight share structure and prospective ground combine to give this one decent odds. Once again we warn that there is a limited supply of shares at prices anywhere near the C$1 level and therefore if you fail to practice buying discipline you will reap the results in the form of an ugly entry price only a mother could love.

Disclaimer: We own shares of Smash Minerals that were acquired in the low 90 cent range on the day of the IPO and we plan to purchase more as outlined herein. We do not own shares of other companies mentioned in this commentary with the exception of ATAC Resources. We have not received compensation from any party for this analysis. This is not investment advice, which you should seek from a licensed investment professional.

About the Author

David Zurbuchen is currently Managing Partner and Co-Editor of Augment Partners Inc., provider of The Metal Augmentor subscription service.

The Metal Augmentor is a unique subscription service located at www.metalaugmentor.com. The main purpose of The Metal Augmentor is to aid both new and experienced investors in navigating the fascinating, dangerous, and rewarding world of investing in physical metals and mining equities. Our focus is on gold and silver but we also provide in-depth coverage of the other major metals and markets in general.

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