E-mail from James Andrews:
August 2002
Starfield Resources Inc. (SRU-TSX-V and SRFDF OTC-BB)
Can Starfield Resources Inc. Deliver on Investors' Expectations?
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Having written about SRU and its massive Ferguson Lake project since it's
beginning, I learned over time that predicting SRU's share price movement is
not advisable for a newsletter writer. So lets get back to fundamentals:
What is SRU's potential and how and when can such a potential be realized?
In order to even come close to an answer, we must step back and define and
assess the important FACTS.
Ferguson Lake - The Facts
Inco found and extensively explored the Ferguson Lake deposit in the late
fifties. It was held in their inventory for over 40 years but mysteriously
lost it in the mid 90's. Inco explored mainly for Nickel and Copper.
Platinum and Palladium were then not considerate important. At the time the
property was released, Inco had drilled over 30,000 meters and spent in
excess of $12M in exploration funds (2002 Dollars). Inco did establish a
Ni/Cu resources base of 6.3M ton of ore with no value given to Pt/Pd.
Obviously, or mistakenly, Inco thought the property not to be of sufficient
value to pay the ongoing yearly lease cost and lost it?!
In 1998, Starfield acquired the property because of its Platinum / Palladium
potential. In the words of Glen Indra, SRU's president: "Nickel / Copper was
great but not as great as the Pt/Pd potential". SRU's management thought
this to be an easy deal to do: "do a magnetic survey, augment the Inco
drilling, show some decent Pt/Pd grades and sell the whole thing back to a
major mining company." At that point theory and reality started to go in
different directions. The magnetic survey showed an anomaly extending for
14km, far more than the small area drilled up by Inco. Now what? Obviously,
management could not ignore these results, as the potential impact on the
value of the property was immense. The anomaly needed to be tested by the
drill bit, to confirm what the magnetic survey had shown. Soon it became
clear that Inco had found only the tail of the tiger. Their drill holes
eventually lost the deposit because they did not drill deep enough going
west. As the deposit dipped down Inco stalled out over top!
Allow me to continue with a great story, as surly this is one. After
management's recognition that this "could be" the next Vosey's Bay deposit,
difficult strategic decisions needed to be made: would SRU want to finance
the huge exploration cost on their own? How would the company be going to
raise these funds in a then very difficult financial market? Would they
eventually be forced to find a major mining company as partner, giving up
some of the unknown value for relatively small amounts of money? How would
investors react to a multitude of financings year after year? And what of
the risk of not finding sufficient quantity and quality of ore? I would
suggest that these questions posed a serious test of management resolve and
strength 3 years ago and, in many ways, still do today.
Investors ultimately have to rely on management's professional skill and
business savvy. If, at the same time, management is personally invested in
the company then investors know that risks are more evenly distributed. It
may not be widely known but SRU's managers have, since the beginning, a very
significant personal stake in the company.
Management did make the decision to move forward alone. Risk analysis showed
that every dollar invested would yield several dollars of value in the
ground. Therefore, ongoing fund raising would not dilute the company over
the long haul, as the asset value of the firm would be reflected in a higher
share price even though more shares would be outstanding. Raising money,
delivering results and raising more money at a higher price was tested by
hundreds of resource juniors with apparent success in the past. In addition,
the resource anomaly was so large that there seemed to be a high probability
of "sweet spots" with exceptional high grades occurring throughout the
exploration program, again creating interest and a buzz in the market.
Investors may have reasons to ask if such an approach was and is in the
investor's best interest; after all: why not sell the whole darn thing? The
writer believes that the "invested management" knows best!
Enough of the past lets fast-forward to "now" three years into exploring the
Ferguson Lake deposit.
Facts:
- 30% of the anomaly has been drill tested
- 50 Million shares outstanding
- Inferred Resource base of 60 Million tones to date
- Ore value of U$130/ton ($8Billion value in the ground)
- Nickel / Copper sweet spots of up to 2.5% combined
- Platinum / Palladium of min. 2 gram/t throughout the system
- Platinum / Palladium sweet spots of up to 130 gram/t
- 100% ownership
- Two rigs and four crews drilling 24hrs a day
- 82,000 meters drilled to date (incl. Inco drilling)
Share price: 40 cents (52 week high / low $1.14 - 35 cents)
Down side risk in SRU shares:
- Break up value lower than market capitalization - not a risk
- Not finding enough value in the ground - not a risk as present value is
already higher than capitalization
- Exploration financing failure - minimal risk due to proliferation of
"Canadian Flow Through Funds" interested in qualified exploration expenses
Up side potential in SRU shares:
- Continuation of drilling success of the magnetic anomaly - high
- Development of a distinct and prolific Platinum / Palladium horizon making
Ferguson Lake a premier mine site for Pt/Pd - high
- Probability of defining a high grade Ni/Cu "Vosey's Bay" type ovoid - high
The Ferguson Lake deposit could well turn out to be one of the largest
Ni/Cu/Co/Pt/Pd deposits ever found. Its tonnage potential is well over 150M
ton. The Platinum and Palladium grades contained within the massive
sulphides push the in situ rock value to very attractive levels. In
addition, the newly discovered high grade Platinum and Palladium horizon,
which seems to envelope the whole massive sulphide deposit, will act as a
catalyst for extensive and exiting new exploration laying the foundation for
a prolific Ni/Cu/Pt/Pd mining operation.
Reality check
No matter how low the risk and how high the up side, fact is that most
investors dread long drawn out exploration programs. Individual drill
results are often difficult to assess and incorporate into the company
valuation. At the same time Securities commissions restrict companies from
announcing more than the actual assays. Therefore, any valuation impact
questions investors have often remain unanswered.
Management's challenge is:
- To better communicate the extent and goals of its drill program and how it
fits into the big picture
- To communicate critically each of the drill programs successes and
failures
- To periodically update the investing community on how the big picture is
evolving
Failure to deliver on this could result in investor burn out and eventual
disinterest in owning the stock.
LK&Z Opinion
The Ferguson Lake deposit is only reluctantly revealing all its geological
secrets but the best is yet to come and SRU WILL deliver on investor
expectations!
SRU's common shares give risk investors a low risk opportunity to
participate in a company with very high leverage return possibilities.
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