Probe Mines brings ex-Barrick CEO on board

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2014-09-23

On Sept. 16, a day after Jamie Sokalsky stepped down as Barrick Gold's (TSX: ABX; NYSE: ABX) president and CEO, came news of his first post-Barrick appointment: director and chairman of junior Probe Mines (TSXV: PRB).

Sokalsky, a long-time Barrick executive who left the company after the latest management shakeup at the gold miner, is quite a catch for Probe.

The move is seen as a big endorsement of both Probe and its Borden gold deposit in northern Ontario and comes just ahead of the project's first preliminary economic assessment (PEA), due in the fourth quarter.

“I think the project is growing to the point where we can attract people of Jamie’s calibre, so I think it was a really good fit for us,” said Probe president and CEO David Palmer in an interview this week.

“It’s a very critical time for us because we are transitioning from an explorer to a developer and his skill sets are very, very relevant for where we are now, so he’s going to be able to contribute a lot to the growth of the project.”

Palmer says the match, which came about through Probe director Gordon McCreary, a good friend of Sokalsky’s, arrived at exactly the right time.

Sokalsky, who has already joined the board as a director, will also take over as non-executive chairman at Probe’s next annual general meeting in late October, when the company’s current chair, Patrick Reid, offically retires.

Sokalsky was at Barrick's helm for two years after spending 13 years as the company's chief financial officer. As CEO, he was considered a competent leader who guided the company through a difficult time by cutting costs, selling assets, and paying down some of the company's debt.

As for what attracted Sokalsky to Probe, Palmer believes it comes down to the company’s no-nonsense approach and high standards.

“My feeling is he liked the philosophy of the company, which is very pragmatic — focus on the project, on the technical work, keeping high standards,” he says. “The project has benefited from that kind of philosophy in that it’s grown over the last four years to build that critical mass that we needed to look at an actual development project.”

Clearly thinking ahead to development at Borden, Probe also recently landed 35-year mining vet John Haflidson as an advisor. Haflidson's underground mining expertise includes 10 years as manager of Barrick's Holt-McDermott mine, which has a similar geometry to Borden's underground zone.

Economic assessment

The PEA that Probe will release later this year will bear only passing resemblance to the one it originally planned to release in March 2013.

The Borden deposit, which was discovered in 2010, was at first seen as a low-grade, open-pit bulk tonnage project. By early 2013, the company had outlined more than 4 million oz. in resources at a grade of 1 gram per tonne.

However, the discovery of a deeper high-grade zone at the project in late 2012 — the discovery hole cut 51 metres of 10.3 grams gold per tonne — changed everything just as gold prices started to collapse and large open-pit developments lost their lustre.

“Back when we first made the Borden discovery, bulk-tonnage deposits were in favour,” Palmer recalls. “But it wasn’t long after that that the market started to realize that they were very expensive to build. They were very sensitive to the gold price, and if you look at a lot of those deposits from that window, you don’t see much out of them now because of capex requirements.”

Since the high-grade zone discovery in 2012, Probe has refocused the project on underground development, which Palmer says should come with a lower capex and better economics. In June, Probe released its first underground constrained resource, with 1.6 million indicated oz. gold contained in 9.3 million tonnes grading 5.39 grams gold. Inferred underground resources add 426,000 oz. gold contained in 3 million tonnes grading 4.37 grams gold.

The estimate used a cutoff grade of 2.5 grams gold per tonne and a gold price of US$1,300 an oz.

“The great thing about this is we’ve continually desensitized the project to the price of gold. We’ve reduced capex requirements,” Palmer says. “As the grade goes up, you can look at smaller mills — we’re probably looking at something around a 3,000-tonne-per-day undergrournd operation.”

There's still an open-pit resource at Borden — 2.3 million oz. gold in 70 million indicated tonnes grading 1.03 grams gold — but Palmer sees the open pit as an opportunity to add value down the road, assuming higher gold prices, rather than the central development.

“There will be a small pit that we’ll use as part of the ramp-up of the underground operations just to top up the mill, but really what we’re doing is deferring the open-pit, lower-grade material until later on with better markets and better gold prices,” Palmer says. “So what it gives us is a lot of optionality.”

Because the company had done so much work on a PEA for the project when it was still imagined as an open-pit mine, including metallurgical and environmental baseline work, Probe should be able to deliver a feasibility study within a year or so of the PEA.

Scotia report

While Probe has an enthusiastic following among investors eager to pore over the upcoming PEA, not everyone is impressed with Borden. In May, Scotia Capital mining analyst Mike Hocking issued a sell rating on Probe and downgraded his price target to on the stock to $1.30 from $3. A month later, after Probe released its high-grade resource, he lowered his target again to 50¢.

Where other mining analysts saw a “robust” high-grade underground deposit, Hocking saw a “moderate grade” zone, and wrote that a more reasonable cutoff grade for an underground mine would be 5 grams gold per tonne, rather than the 2.5 grams gold that Probe used.

Moreover, he wrote that the awkward orientation of the high-grade zone, which he pegged at 35 degrees, would be awkward and inefficient to mine, leading to higher operating costs because the company would have to employ more expensive mechanized cut-and-fill mining methods in places.

He calculated a standalone 2,500-tonne-per-day underground mine at Borden as having a net present value of $51.6 million at a discount rate of 8%, with a payback period of eight years and an internal rate of return of 11%.

Palmer says his main disagreement with Hocking's analysis is regarding an appropriate cutoff grade.

“Everybody’s entitled to their opinion and we respect that,” Palmer says. “I think where we differed and what we felt was kind of lacking is in the Scotia report they were using a very high cutoff, very unrealistic I think for this deposit. Of course, the higher you take your cutoff, the less ounces and the less continuity you’re going to have.”

On the orientation of the high-grade zone, Palmer, who noted that the other nine analysts who cover Probe have been very positive on the story, acknowledged there's no question that a vertially dipping body is easier to mine underground.

However, he says there are a lot of analogues to show that Borden, which he says dips at a 40 to 45 degree angle, won't be too difficult to mine because it's quite thick compared to many underground deposits, which have a 5-10 ft. minimum mining width.

“We’re looking at something that’s 25 to 30 metres wide, so 75 to 90 ft. wide — and that thickness, even though it’s slightly inclined, allows us to treat long-hole open stopes as vertical stopes, so our stope height will be 25 to 30 metres,” he explained. “Although the orientation isn’t ideal, the thickness makes up for it and allows us to treat it as ideal. So we’ll be able to use mostly long-hole open stope, which of course is a very efficient, cost-effective underground method.”

Mineralization at Borden is controlled within a ductile shear zone with a higher-grade core surrounded by a lower-grade envelope of mineralization. While it looks different than most Ontario gold deposits, it's still considered an Archean lode-gold deposit.

The broad zone of mineralization at Borden is up to 120 metres wide over 3.7 km in strike length, and extends to at least 650 metres depth, while the high-grade zone is 15 to 30 metres wide with a low-grade halo extending further out.

While the upcoming study may help resolve any doubts about the project, another matter that's high on Probe's list for 2014 is the consolidation of its land package at Borden.

The company has completed a number of land acquisition deals over the past couple of years, but it isn't finished yet.

“There’s some private ground that we’re currently working on now to bring that into the property package, so we’re just in negotiations on that now,” Palmer says.

The project is located near Chapleau, Ont., 160 km southwest of Timmins and within easy reach of a highway and other infrastructure.

After completing a $26-million flow-through financing at a 20% premium in August, one thing Probe will not have to worry about for a while is money. The junior has $45 million in the treasury, with another $4 million anticipated in early 2015 as part of its sale of the Goldex royalty. Palmer says he's not expecting to need to go back to the market until after the company achieves its next couple of milestones, the PEA and then a feasibility study.

“I think probably, given our position, we’re looking at project financing.”

Probe Mines recently traded at $2.31 in a 52-week range of $1.99-3.95, with 84.8 million shares outstanding. Raymond James analyst David Sadowski has a $3.40 target on the stock with an "outperform" rating, while Euro Pacific's Ryan Walker has a target of $4 with a "speculative buy" rating.