RSA, PGEs and ARQ
Platinum group metals are hot, with once again, Russia not making
deliveries of the metal. Russian sales negotiations with Japanese
broke down as they wanted sizable orders at high average monthly
prices. Palladium prices began to climb, Japanese investors began to
buy and last Monday a large Japanese trading house was caught short. It
waited for European dealings and began to drive the price through $800
and it continued to a record high of $859 a week ago. Meanwhile a
large US fund entered the market last week and bought platinum, taking
it to an eleven year high, just over $600.
<p>
With both platinum and palladium hitting new highs. Many junior mining
companies have been acquiring PGE properties, including a number of
RSA picks that now gives us some broad exposure to PGE exploration
properties.
Anooraq, ARQ on CDNX Recent Price $0.70
Opinion - strong buy
All 35 holes (6758 metres) drilled to date have successfully
intersected platinum-palladium-rhodium-gold (PGM) horizons with
associated copper-nickel mineralization over a strike length of 4.5
kilometres. There is a total of 11.5 kilometres of strike length of
the prospective Platreef horizon on the property.
<p>
Phase One drilling has discovered a new PGM deposit on the Platreef
property which has excellent continuity and is potentially amenable to
open pit mining. The deposit has a tabular shape and is wide open down
dip and along strike. It currently measures 1650 metres long,
approximately 20 metres in thickness and extends in excess of 250
metres down dip. Significantly, thick PGM build-ups occur at the
limits of the present drilling on the open-ended western and northern
flanks of the deposit as evidenced in holes
13 (46 m grading 1.60 g/t or 6 m grading 4.61 g/t),
14 (35 m grading 2.16 g/t or 5.5 m grading 5.62 g/t),
17 (48 m grading 1.61 g/t),
20 (21 metres grading 2.53 g/t or 5.0 metres grading 4.26 g/t),
21 (45 m grading 1.79 g/t) and
24 (22 m grading 2.00 g/t).
In addition, the deposit being delineated by Anooraq contains internal
zones of higher-grade with the highest grade horizons averaging
greater than 6 grams PGM per tonne over 1.0 metres in thickness.
<p>
Extensive additional drilling is being planned by Anooraq to further
delineate this major PGM resource. The drilling intensive Phase Two
program will explore the westerly down-dip extension of the tabular
deposit (with priority given to holes targeted immediately west of the
areas of thick platinum-palladium build up) and also the remaining 7
kilometres of prospective Platreef stratigraphy available along
strike. The property is located on the Platreef layered mafic horizon
that hosts eight PGM deposits controlled by Anglo American Platinum
Corporation Limited (Amplat’s property) immediately to the south.
<p>
Also important is that recent fieldwork on the farm Rietfontein 2KS
has identified two substantial platinum-palladium- copper-nickel soil
geochemical anomalies indicative of Platreef-type PGM mineralization
such as that found on Amplat’s ground immediately adjacent to the
west. These strong anomalies, which are 1.6 and 1.4 kilometres long,
will be drill tested during Phase Two. Farm Rietfontein 2KS makes up
part of the Platreef property and is located immediately southeast of
Amplat’s property. Anooraq is working to acquire further mineral
rights in the region through the South African company Plateau
Resources (Pty) Limited in which Anooraq can acquire up to a 100%
interest.
<p>
<h4>Valuation</h4>
<p>
ARQ is priced very very cheaply, probably because North American
investors do not understand the risks in South Africa. I will discuss
this farther down. If you just value ARQ at US$25/ounce of
mineralization, which is very low with todays PGE prices, we still
find it is way under valued. The current market cap of C$14MM, or
US$10MM is discounting a 400,000 oz. deposit. It seems easy to assume a
pit could follow the mineralization for at least 150 m down dip and
from that it is easy to see more than 1 Moz in the currently drilled
area.
<p>
The big upside is finding another 7.25 Moz Sandsloot deposit on the
property and the odds of this are very good.
<p><h4>
South Africa and ARQ
</h4><p>
It appears that North American investors have difficulty understanding
the South African mining scene and over-estimate the political risk.
This will be their mistake and for this reason, and the fact ARQ needs
to do another financing is the only reason ARQ is so cheap.
<p>
The risk in South Africa is not in exploration and discovery stage where
ARQ is at, but mainly with labor disputes and poor mining conditions
in the countries very deep, high costs gold mines.
<p>
No doubt, South Africa is probably one of the most pro mining
countries left in the world today. In regard to a recent Amplats
announcement, Jan Bredell, deputy director-general at the minerals and
energy department, said "Any announcement to develop our resources is
obviously excellent news," he said. While the department would study
the proposals in the days to come, Bredell said it was indicative of
the support being given to minerals development by South Africa's
major mining houses.
<p>
Investors need to understand that the mining sector is totally
different in South Africa and around the world because of the current
metal price environment. At current prices, production of South
Africa's numerous gold producers is worth around $4.4 billion. That
compares with platinum group metal output of mainly Amplats, Impala
and Lonmin of $4.9 billion.
<p>
The South African PGE miners want to control as much of the PGE output
around the world as possible. This is why the majors have numerous deals with
Canadian juniors such Mustang and Pacific Northwest. This is why Stillwater
could be taken over by Goldfields/Franco. The South African majors are
swimming in cash and they will buy up any deposit that is proven up.
The most obvious place and easiest is right in their own back yard
with nearby infrastructure, such as ARQ's location. The Hunter/Dickinson
group, prove up deposits and sell them, they are very good at it. Lets
have a better look at what ARQs neighbor, the platinum mining giant
Amplats. This will help give an understanding of the current PGE
environment and South Africa.
<p>
Anglo American Platinum Corporation (Amplats) is to spend $1.7 billion
(R12 billion) over the next five years raising annual platinum output
to 3.5-million ounces. The effective increase in platinum output,
over and above already announced projects, is 900 000 ounces -
roughly a fifth of the world's total platinum production. The move
cements Amplats' claim to being the dominant world platinum producer
and could fulfill an expected three to four per cent growth in demand – a
supply deficit recently upgraded by South African platinum producers.
<p>
Amplats' spending power dwarfs rivals
<p>
Just to put things in perspective, Amplats' R12 billion spending
target over the next five years (which does not include announced
projects) is just under a third of its current market capitalization
of some R39 billion. It also represents the majority of nearest rival
Impala Platinum which has a market value of R15.7 billion. Analysts
believe the capital outlay will probably make life difficult for the
smaller new entrants to the platinum market.
<p>
ARQ is next door to Amplats and there is little doubt that Amplats
would buy out any decent deposit that ARQ would find. It is nearby
Amplats current mines and infrastructure and would be ideal for them
to mine and process. I would be willing to bet that ARQ could get
more than US$25/oz when PGEs are the hottest metal out there. This
would be a small expenditure for a company like Amplats.
<p>
I expect strong prices for PGEs to continue for some time. Demand
continues to grow and will be especially robust if fuel cell
technology takes off. It will take several years before the increased
cash flow and exploration turns into mine production that could sway
the current favorable supply/demand scenario or a major world
recession would be needed to slow down demand.
<p>
<h4>
Conclusion
</h4><p>
High PGE prices will be around for a few years yet. ARQ is
definitely the best buy in the PGM sector. It is early days, but the
Platreef is consistent enough to assume that the deposit will be mined.
<p>
At present, ARQ has C$1MM cash left and will have to do another
financing. This is one of the major factors that the price is down.
However, I would expect that Hunter/Dickinson will finance at a
price equal to or above the last financing price of $0.85.
<p>
Thus far, 35 holes completed to date and 33 intersecting PGEs
over a 4.5 km strike length. These holes at a 1.7 g/t cutoff grade
give a 3 g/t PGM average grade and with a total of 11.5 km of strike
length to explore, I believe the upside from a market cap of C$14MM is
very large and suggest a strong buy at these prices under $1.00. In
RSA I will average down by buying at $0.70 for an average buy price of
$1.00.
<p>
<A HREF="http://chart.canada-stockwatch.com/sw/chart.dbm?symbol=arq">Chart</a>
<p>
website hdgold.com <br>
Phone (604) 684-6365, or 1-800-667-2114.
<p><center><h3>
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