Express 2007-08

October 24, 2007

Why does Richard Nemis think Noront's nickel copper discovery is "bigger than Voisey's Bay"?

Synopsis: On October 22, 2007 I gave a workshop presentation at the Cambridge Conference in Toronto titled "Is McFauld's Lake shaping up into a Great Canadian Area Play?" In it I argued that all the key conditions have been met except confirmation that the discovery made by Noront Resources Ltd (NOT-V: $6.24) on its Double Eagle project has world class proportions. The discovery Noront had made was an enviable achievement which any of the other McFauld's Lake juniors would love to duplicate, but significantly higher valuations for the area play juniors would require their own discovery holes or evidence that Noront's discovery was indeed world class. While I thought this was possible, I was puzzled why some people, including Noront's CEO Richard Nemis, thought the optimistic outcome was a sure thing. Late Monday afternoon I sat down with Bruce Durham of Temex Resources Corp (TME-V: $0.80) and discovered why there is very good chance that the Double Eagle discovery will grow far beyond the 1-5 million tonne deposit size range currently being debated by analysts. What Durham showed me was geophysical data that is now in the public domain and which suggests that the current drilling focus is on the northern 200 metre long tip of an EM conductor that has a strike of 2,400 metres. Should the high grade nickel-copper-PGM mineralization already discovered prove to be intimately related to that conductor and persist at similar grades, comparing the Double Eagle discovery to Voisey's Bay would cease to be the outrageous thing it now seems. And the first Great Canadian Area Play in a decade would be born. The purpose of this Express is to make sure KBFO members understand the potential of this play.

Noront's Double Eagle discovery has delivered a world class grade, but not yet a tonnage which easily puts the gross metal value at more than $10 billion. The discovery hole #1 assayed 36 metres of 1.84% nickel, 1.53% copper, 1.14 g/t platinum, 3.49 g/t palladium, 0.13 g/t gold and 4.8 g/t gold. At current metal prices ($14/lb nickel, $3.50/lb copper, $1,447/oz platinum, $363/oz palladium, $760/oz gold and $13.50/oz silver) the hole #1 intersection represents a rock value of $717 per tonne at these prices. This rock value is well above underground mining costs, and far above open pit mining costs. The most recent hole for which we have assays, #5, which was drilled down the apparent dip of the structure, delivered a spectacular intersection of 68.3 metres of 5.9% nickel, 3.1% copper, 2.87 g/t platinum, 9.78 g/t palladium, 0.61 g/t gold and 8.5 g/t silver. The hole #5 intersection has a rock value of $2,300 per tonne. Within hole #5 was a super-rich 3 metre interval grading 8.7% nickel, 10.9% copper, 40.79 g/t platinum, 14.57 g/t palladium, 9.39 g/t gold and 8.7 g/t silver. (One hopes that the unusually high platinum assay, which is 2.87 times that of palladium, has not been mixed up with the palladium assay, for the ratio of the palladium to the platinum in the 68.3 metre intersection is about 3.4 to 1.) This interval has a rock value of $5,827 per tonne. Without question these are world class grades.

But what about the tonnage? The 3-dimensional rendering above was apparently produced by a university professor based on the drill coordinates provided by Noront. It has received widespread circulation through email and Internet postings. I have seen a 3-dimensional modeling done by Freewest's team which does not flesh out the mineralized zone in the same manner but does suggest a similar southerly plunging irregular body. The drill plan below produced by the Temex team suggests a somewhat southwesterly strike. If we assume a pipe-like body with a diameter of 75 metres, a strike of 150 metres, and a 4.5 specific gravity, we end up with a tonnage of about 3 million tonnes. Pessimists have been estimating tonnage in the 1-2 million tonne range while optimists have been estimating 2-5 million tonnes. Because we have assays for only a handful of holes, it is hard to assign an average rock value to this body of mineralization. If we assume a $1,000 per tonne rock value, the GMV ranges $1-$2 billion for the pessimistic tonnage scenario, and $2-$5 billion for the optimistic scenario. That is not world class by my definition, and based on what has been reported so far, the $773 million implied value for Noront's Double Eagle project offers poor speculative value. There is rational reasoning behind Paul van Eeden's masochistic compulsion to keep shorting Noront and blogging about his actions just before the stock lurches to new levels. But where I disagree with Paul and his geological advisor Brent Cook who worked out the geometry on the basis of Noront's disclosures is the assumption that what you see is all there will ever be to see.

Admittedly it has been disconcerting to watch Noront's exploration team get lucky with the first couple holes into an electro-magnetic anomaly and then start missing with modest stepouts. But one has to keep in mind that the interpretation of the conductor is based on HLEM data collected on 200 metre line spacing. The discovery sits on one of two claims acquired from a private company in May 2007 for 400,000 shares, a 1% NSR, and a promise to drill at least one hole by year end to keep the claims from lapsing due to lack of assessment work. Because Noront had raised a lot of flow-through money it decided it could afford to earmark $400,000 for this project. Management liked the EM conductor, and although it was on the edge of a magnetic high, which was not the preferred magnetic signature for a polymetallic VMS sulphide zone that theoretically should be associated with a magnetic low signature that could readily be interpreted as weakly magnetic felsic volcanics, the target host rock for VMS deposits, the conductor was enough on the edge of the magnetic anomaly to justify ignoring the likelihood that this EM conductor was just another case of graphite perched within magnetic mafic rocks.

That the discovery hole contained chalcopyrite (copper sulphide) and pentlandite (nickel sulphide) within a mafic rock called peridotite came as a total surprise to Noront managament and Neil Novak's exploration crew whose exploration focus in the McFauld's Lake area had been exclusively for VMS deposits containing copper, zinc, lead, gold and silver mineralization of which Spider and KWG had found several high grade but small lenses on nearby ground. Everybody who tackled the McFauld's Lake region had prioritized strong EM conductors coincident with magnetic lows as drill targets. EM conductors coincident with magnetic highs were simply ignored because the nickel-copper magmatic sulphide deposits with economic grades were not even considered a geological possibility.

This line of thought is probably driving the skepticism of observers who see this as an isolated high grade but small 1-2 million tonne freak. When you compare the Voisey's Bay system, which hosts 78 million tonnes of 2.2% nickel, 1.7% copper, and 0.134% cobalt with a rock value of $840 per tonne and a gross metal value of $66 billion, Noront's Double Eagle discovery looks downright puny. The Ovoid alone, whose discovery in March 1995 nearly 6 months after Diamond Fields pulled 71 metres of 2.23% nickel, 1.47% copper and 0.12% cobalt with a rock value of $828 per tonne in October 1994, hosts 31.7 million tonnes of 2.96% nickel, 1.89% copper, and 0.16% cobalt with a rock value of $1,100 per tonne and a gross metal value of $35 billion.

Thus when Financial Post reporter Peter Koven wrote the first meaningful mainstream media coverage of Noront's discovery on October 13, 2007, the headline "Is this Voisey's Bay II?" and quotes by Noront CEO Richard Nemisthat "this could be bigger than Voisey's Bay" bordered on the ludicrous. Was Nemis just an incorrigible old-style promoter enjoying his last hurrah? The shorts have certainly thought this to be the case, and while I myself felt there was a good possibility that this discovery could scale to a world class level that would kick off a resounding Great Canadian Area Play, a logical possibility that has not yet been ruled out by systematic exploration, making such sure thing predictions struck me as mere wishful thinking.

What changed my thinking was a total magnetic field map and an electromagnetic conductor map involving HLEM data processed by Scott Hogg & Associates on behalf of Fancamp Exploration Inc (FNC-V: $2.06) which owns a group of claims whose edge is about 200 metres from the discovery. In an effort to help my readers appreciate this information I have scanned the hardcopy, rotated it to give it a north-south orientation, highlighted the key geophysical feature, and annotated the claim block ownership. The EM map above shows a distinct EM conductor (highlighted in yellow) starting in the discovery area (circled) on the claim block Noront acquired from Greenstone/Condor in a southwesterly direction for about 300 metres before it bends south, and then curves back into a southwesterly direction for 2,000 metres before it peters out. If the mineralization Noront has discovered is associated with this conductor, we are dealing with a tonnage footprint in the tens of millions. Of course Noront will have to confirm through drilling that this mineralization is indeed associated with the longer conductor, and not just a short conductor that happens to adjoin the long one that might consist of the dreaded graphite. And of course assays will have to demonstrate to what extent similar grades prevail within this longer conductor. These are some big "ifs", but what is important is that these "ifs" do exist, something I was not aware of until Monday afternoon, and which I highly doubt Brent Cook was aware of when he analyzed the information so far disclosed by Noront. In the context of this geophysical information I think there is good reason to hold one's breath as Noront's drill rigs probe the length of the conductor.

An obvious question is why, if this EM conductor is so exciting, Noront had not drilled it a couple years ago when speculators were still optimistic that McFauld's Lake hosted major VMS deposits. The answer lies with the total magnetic field map above on which I have super-imposed in yellow the EM conductor. Note how it wraps along the flank of the magnetic high anomaly. The rocks represented by the magnetic high feature would have been interpreted as mafic or ultramafic rocks that are not associated with volcanogenic massive sulphide deposits, which are formed through seabed volcanoes with a felsic composition. Because nobody was considering the possibility of mafic rock hosted magmatic sulphide deposits, the conductor would have been dismissed as graphite within the mafic rocks. Noront was willing to drill the target on the Greenstone/Condor claim because it seemed to be a separate conductor whose association with a magnetic high might have been just the result of distortions that crop up at the edges of geophysical data sets. Of course Noront and everybody else is now hoping that it is all one big conductor representing 2,400 metres of nickel-copper-PGM bearing magmatic sulphides and that the initial discovery is similar to the Discovery Hill zone at Voisey's Bay! Noront is now conducting detailed ground geophysical surveys over this conductor prior to drilling.

Conclusion: What makes this story exciting is that numerous such untested EM conductors parked within magnetic highs exist within the McFauld's Lake region. The entire region can be considered virgin territory, untested for magmatic sulphide deposits, particularly if age dating now underway indicates that the peridotite that hosts the Noront discovery is Proterozoic aged rather than Archean, an outcome which indicates bigger size potential and location potential just about anywhere that there is evidence of mafic intrusives. Most of the companies are now participating in new airborne geophysical surveys that are being flown on 100 metre spacing. MacDonald Mines Exploration Ltd (BMK-V: $0.87) is gearing up to drill targets on its 100% owned McNugget claims. MacDonald is up 135% since I recommended it as a Good Absolute Spec Value Buy at $0.37 on September 18. Probe Mines Ltd (PRB-V: $0.87) is down a bit from my Good Absolute Spec Value Buy at $0.90 made on September 18, but that should change in the wake of a $3.7 million financing just announced.

One company that the market has pretty much ignored is UC Resources Inc (UC-V: $0.48) which has two strategic claim blocks north and south of Noront's Double Eagle that it has optioned 55% from Spider Resources Inc (SPQ-V: $0.18) and KWG Resources Inc (KWG-V: $0.16). What was a rather unexciting third pass at the VMS potential of the two Spider/KWG blocks has turned into a brand new play. Compared to Spider and KWG who have 308 million and 243 million shares fully diluted and net interests of only 23%, UC has 100 million fully diluted and a 55% net interest that translates into an implied project value of only $87 million. Spider's Neil Novak is an insider of UC, and is also involved with the exploration services company operating Noront's exploration program. UC is gearing up to reinterpret its former low priority anomalies and aims to be drilling in early 2008. I am recommending UCResources Inc (UC-V: $0.48)as a Good Relative Spec Value Buy at $0.48 for anybody seeking relatively cheap exposure to the original McFauld's Lake land package.

The other area play junior I'm issuing a Good Relative Spec Value Buy at $0.80 for is Temex Resources Corp (TME-V: $0.80), which is in a 50:50 staking venture with MacDonald Mines that has drawn upon the expertise of Bruce Durham. Because of its 72 million fully diluted shares and 50% net interest Temex sports a heftier $115 million implied project value for its land holdings, but the company stands to benefit because it has the backing of Eric Sprott and has put in place the logistics to explore its land position very quickly.

*JK does not own any of the shares mentioned herein