Jay Taylor on GPXM minus the glowing review of the managment for those of you that don't want to hear it..............
THANKS TO JAY FOR ALLOWING THE COMPANY INVESTORS ACCESS TO THE REPORT SOME WEEKS AFTER HIS PAYING CUSTOMERS....... FAIR AND EQUITABLE OF HIM.
Stock Pick of the Week (BY Jay Taylor)
Golden Phoenix Minerals
Business: - Exploration, development, and mining of
molybdenum, gold, and silver
Traded OTCBB: GPXM
Shares Outstanding: 180,390,972
Fully Diluted: 198,259,212
Price Recommended 7/3/99: $0.13
Price 9/20/07: $0.31
Market Capitalization: $54 Million
Progress Rating: “A”
Telephone: 775-853-4919
Golden Phoenix Minerals (GPXM) was virtually on its deathbed during the early years of this new century. It wasn’t a lack of good mining projects that led to its demise. Pure and simple, the shareholders’ misfortune was related to managerial inadequacies. Had I understood management’s inadequacies, this stock would never have made it onto our list. But thanks to the gargantuan efforts of Rob Martin, who is a subscriber of this letter; David Caldwell, a founding board member and now CEO and a team of other dedicated individuals, Golden Phoenix is back on track and positioned to perform. This is in part due to its high-grade Ashdown Molybdenum Project, and there is also good reason to think its Mineral Ridge Gold Project could also be revived and run profitably by the end of 2008 or early 2009.
In mid September, your editor visited both the Ashdown moly mine and the Mineral Ridge gold and silver mine. On that trip were several members of the GPXM management team. While it is impossible to say with certainty that GPXM is on its way to becoming a household-name mining company, what I experienced as an eyewitness was most encouraging. As such, I believe that GPXM has the potential to appreciate in value by 3 or 4 times its current share price. Please permit me to say why I am now very bullish on this formerly troubled corporate entity, starting with the company’s now profitable Ashdown Mine.
Ashdown Molybdenum Mine
Humboldt County, Nevada The Ashdown Molybdenum Mine is one of the highest-grade molybdenum mines in the world. It is jointly owned by Golden Phoenix, a 60% partner, and Win-Eldrich Mines Ltd., a 40% partner. Golden Phoenix serves as manager of the project in conjunction with a management committee, and is working to eventually make Ashdown a “stand-alone” operation. The partners are currently engaged in a binding arbitration to determine if an additional 9.5% ownership interest is to be transferred from Win- Eldrich to Golden Phoenix under the terms of Ashdown’s operating agreement, but regardless of the outcome, both partners are positioned to enjoy the benefits of this unique property.
This wonderful asset, combined with the new managerial talents introduced into the company, served to save Golden Phoenix. You might be thinking if this is such a high-grade mine and if the company is now in production, why has the stock’s performance been relatively lackluster following the recently announced quarterly profit?
One reason for that in my view is that, so far, little is known about the long-term prospects of this mine. Without a sense of its mine life and scale of operation, it is difficult for analysts to get a handle on the intrinsic value of the project. Another reason is that the moly sector has suffered a fairly sizable correction across the board in the last two months. The high-grade molybdenum currently being mined on the Ashdown Property is from the Sylvia Vein. The vein, which extends to surface, dips at about 45 degrees and ranges in width from 4 to 14 feet thick. The known strike length of this structure, which grades up to 15% molybdenum, is roughly 1,800 feet and it is open on strike and to depth. There are indications of mineralization at surface and from drilling along 4,500 feet of the claim group. The thinking of the geologists is that the mineralization most likely extends to considerable depths and that it may be possible to find the source of this incredibly rich deposit, which in theory could morph into a major mine.
Of course, all of that is hypothetical at this stage. The company has previously reported estimates in excess of 4 million pounds of molybdenum within the mineralized zone under study. A 43-101 report that is expected to validate a similar sized resource is nearing final stages of completion. That should be helpful to investors, but what I believe will really shore up confidence will be a drill program that will extend the prospects for a longer life and/or larger-scale molybdenum project. Given what is already known about the existing Sylvia Vein, its high grades, and the geological potential for it to extend to depth, the probability of scaling up this operation would appear to be quite high. The company is planning a 10,000- to 20,000-foot drill program within the 1,800-foot known strike length to increase the resource under 43-101 guidelines. In my view, a successful drill program extending the size and life of the Ashdown Project, combined with continued profitable production, should launch this company’s shares to much higher levels.
The Mining & Milling Operation
Mining is progressing well at Ashdown, with additional mining faces now being established. It is my understanding that there will shortly be between four and six mining faces, each of which can pull about 35 tons of ore per day, so that between 140 tons and 210 tons per day can be produced to feed a mill that currently has a 100–ton-per-day capacity. It is my understanding that the mill can be increased in size by adding a ball mill and additional flotation circuits and increasing tailings ponds. It is believed that the mill could be doubled for an expenditure of less than $1,000,000.
Current recoveries of molybdenum are in the neighborhood of 80%. The range of recovery is variable. Management believes that it can ultimately increase these recovery rates to higher levels as the milling operation is continually fine-tuned. Mill head grades have been as high as 4.75%, but the average grade is likely to be between 1.75% and 2.75%. With mining activity picking up, the company can now keep its mill running consistently, thereby enabling the mill to be fine-tuned.
It is interesting to note that recently the mill required some maintenance for the ball mill, during which time management was able to continue production by reprocessing some of its tailings. The tailings at the Ashdown Project averaged around 0.5% molybdenum, which is higher than most molybdenum mines’ primary output. Based on the company’s agreement with the buyer of its molybdenum concentrate, product sold is supposed to contain over 50% molybdenum and less than 0.5% copper. A typical concentrate might be something like 56% molybdenum and 0.86% copper. When the copper is higher than 0.5% or the moly is lower than 50%, a penalty is assessed. The reprocessing of concentrate from the tailings was reportedly 48.7% molybdenum and 1.78% copper, so a small penalty was assessed. But the point is that this management team found a way to keep the cash flowing even when the ball mill had to be shut down for servicing.
The Economics of a Small, High-Grade Molybdenum Project
We have seen some of the same investors who were impressed with massive, large-scale molybdenum projects overlook GPXM’s extremely high-grade molybdenum project because of its small size. Below we discuss the need from a market perspective for Golden Phoenix to explore and develop its ore body. There is good reason to believe that the company will be able to expand its molybdenum resources considerably going forward, and there is even the possibility that the discovery of a feeder source for this high-grade mineralization could lead to a massively large porphyry target and major scale mine. But while some of those larger molybdenum discoveries, which have seemed to capture the attention of investors, may never become profitable, this little project operating at 100 tons per day has already managed to report a profit during the second quarter of 2007. And unlike those monster projects, it has been able to turn a profit without spending the huge amounts of capital that larger projects always require.
To be sure, if the company can increase the size of its operations, it will become all the more profitable. But let me run through the economics of GPXM’s molybdenum operation for one moment. The company ships molybdenum concentrate in bags (called “Super Sacks”) that weigh about 3,975 pounds per bag. Each bag generally contains about 54% elemental molybdenum (Mo) equal to about 2,150 pounds Mo. When twelve of these bags are produced, GPXM is able to make a shipment to its buyer based in England. As a general rule of thumb, if Ashdown can produce one shipment per month, it covers the majority of its costs. If it can produce
two shipments per month, it makes a profit. If it can make three shipments, its profits can be very good. And if it can eventually make four shipments per month, profits will be outstanding.
In order to achieve four shipments per month, its operation must have head grades of about 2.3% Mo and steady production averaging over 1.5 sacks per day. That is a goal that may take a few more months of further improvements to reach. However, with the prospect of mining up to 200 tons per day or so, an increase in the milling capacity of up to 200 tons or 250 tons per day by expansion of the mill at some point in the future could enable the project to increase its profitability dramatically, especially given the belief that this expansion could be achieved for as little as $1 million or so. Your editor doesn’t have a real precise handle on how dramatically the economics of a 200-ton-per-day mill would improve, but based on what we know so far about the operations at Ashdown, I have to think it would be dramatic. Consider, for example, that during the first quarter of this year, the company produced 64,842 pounds of molybdenum (30 bags of concentrate, or 2.6 shipments) at a cost per pound of $25. In the second quarter when GPXM registered its first profit, it produced 144,802 pounds of molybdenum (68 bags, or 5.7 shipments) and the cost of production was reduced to $15 per pound. With a high level of fixed costs, the unit cost of additional production decreases significantly. While there would be added input costs if a second ball mill and more flotation circuits were added, there clearly would be additional economies of scale that would most likely further reduce the per-pound cost of producing molybdenum at Ashdown.
Moreover, we would expect additional efficiencies over time. We noted above that molybdenum recoveries have been around 80%. At present Dave Tretbar, a geologist by training, is in charge of milling operations at the Ashdown Project. While operating results have been steadily improving under David’s care, management is also seeking a mill operator who should lead to still further milling efficiencies and also free up more of Mr. Tretbar’s time to focus on his other geological duties, including assisting grade control.
Exploration & Development Should Lift GPXM Share Price
Normally, an ore deposit is explored extensively before a milling facility is established. Had Golden Phoenix not been on its financial deathbed, no doubt the company would have drilled a sizeable deposit before going into production. But GPXM did not have the luxury of developing its Ashdown Property along more conventional lines. Fortunately, its Ashdown Molybdenum Property was of such a high grade that the company has been able to follow the vein and mine out substantial values to generate cash flow and the first quarterly profit in the company’s history.
While following the high-grade-vein approach was vital in saving the company, you will note that the share price has not really responded significantly. I believe that is due in no small part to the perception that Ashdown may be nothing more than a short-life, high-grade mine. While I believe Ashdown has the potential to last for several, if not many, years, based on what is currently known about the Sylvia Vein and the immediate geology, for the market to price these shares higher, it will need to see some scientific evidence. Toward that end, management is planning to undertake a 10,000- to 20,000-foot surface drill program to establish the extension of the high-grade Sylvia Vein along strike down dip. With regard to the prospects for expanding the ore body, we do know the following: (1) The Sylvia is open at depth and geologists believe it could extend to considerable depth; (2) While the focus of development to date has been on a 300-foot length along the Sylvia Vein, the vein has been established by past drilling over a length of 1,800 feet. Moreover, drill holes up to 4,000 feet from the existing workings have assayed up to 1% molybdenum. And we understand there are molybdenum showings traced over two miles on surface.
Golden Phoenix is not a Canadian company, so it is not obligated to report on the basis of Canadian NI 43-101 criteria. However, Golden Phoenix does have a Canadian partner, Win-Eldrich, and some serious Canadian investors such as Sprott & Company, so management is in the process of having a 43-101 report completed shortly. If the 43-101 reveals a reserve of, say, 4 million pounds Mo outlined within the 1,800 feet of strike, then it is reasonable to assume a mine life of three to five years from this zone alone. Add to that the fact that mineralization is open on strike and at depth in the Sylvia Vein, and you have the prospects for a mine life much
beyond that.
Clearly, if a sizeable deposit is outlined, a larger (and I would expect, a much more profitable) operation would likely be planned by management. Assuming the company’s exploration work reveals a larger economically viable deposit, I would anticipate the market pricing of GPXM at considerably higher prices.
Mineral Ridge Gold Mine , Esmeralda County, Nevada
Your editor originally recommended GPXM, not because of its Ashdown Project (which subsequently turned out to be a lifesaver), but because of its Mineral Ridge Gold and Silver Mine, located in Esmeralda County, Nevada.
During the 1980s, because of low gold prices and relatively low energy and low capital costs, as well as the evolution of improved leaching technology, open-pit heap leaching was all the rage for gold mining in the U.S. Mining high-grade underground was no longer in vogue, even at mines where underground mining was profitable in the past, such as at Mineral Ridge. Historically, in excess of 600,000 ounces of gold were mined at Mineral Ridge via underground mining, and the ore was processed using simple gravity and vat leaching methods. Generally, the ore also contributes about one ounce of silver for every ounce of gold.
The last operator to mill Mineral Ridge ore was a company named Homestead, which processed 1.4 million tons of ore and recovered 113,000 ounces of gold at recovery rates of 92% between 1989 and 1992. The ore was trucked 17 miles to the 16-to-1 mill. The thinking now is that a mill properly designed for this property should get north of 95% gold recoveries. Despite a successful underground mining and milling operation in the past, with open-pit heap leach operations remaining very much the desired modus operandi of mine financiers during the 1990s, not one but three companies—Cornucopia, Vista Mining, and Golden Phoenix—were all unsuccessful in generating profits from open-pit heap leaching. The management of Golden Phoenix believes Mineral Ridge can turn a profit again if it is returned to a milling operation. At present, Vector Engineering, a West Coast firm, is in the process of carrying out a feasibility study on this project. Completion of this study is expected in about six months. Your editor toured some of the massive underground workings at Mineral Ridge along with some members of management. At least one member of management—namely, Don Prahl, who saw this operation for the first time—raved about favorable conditions, such as rock mechanics, ventilation, and dry underground conditions. The view is that this mine has considerable gold resources left from underground in the gold-bearing vein structures that vary from 10 to 20 feet thick. The belief is that this project should be able to produce in the beginning at around 60 ounces of gold per day from a 500-ton-per-day operation.
The current feasibility study will take into account some 210,000 ounces of gold from the surface, of which 30,000 is believed to be contained in the leach pads and another 180,000 in the open pits. Drilling will also be expected to increase underground resources over time, but the thinking is that if cash flow can be generated from known gold resources, further development can then be funded from operations. How much capital would be required to get Mineral Ridge producing from underground? Results from the feasibility study should help in determining that. The thinking is that if used equipment can be acquired, it could take place for as little as $5 to $6 million compared to a new mill. In time, it is believed the scale of this project could grow to 1,500 tons per day(180 ounces) or so with an increased gold resource.
What we do know is that there are some indications of very high-grade gold showings on this property, including a five-foot interval assaying 26 opt gold in the Brodie Pit, which is an area where a north/south vein system intersects an east/west system. These high-grade values appear near the contact with an Alaskite dome common on the property. Recently, past drilling was conducted with a view to establishing open-pit mining. We anticipate drilling programs can be designed to better define these opportunities. At this time, we don’t have a real good handle on the economics of this gold project. Management is fortunate to have some 210,000 ounces of gold on surface, which should represent low-cost mining and processing. At $700 gold, that amounts to $147 million worth of metal in the ground. We should have a better feel over the next few months when the feasibility study is completed, but it may be possible that this known resource could provide the basis of funding this large, and largely unexplored, property back into underground and open-pit gold and silver production.
One very important thing to keep in mind is that Mineral Ridge is fully permitted and bonded, with extensive infrastructure, including roads, power lines, processing plants, and administration and assay facilities. When new management came into the company in 2005, they consciously made the decision to put the facility on care and maintenance, and concentrate on Ashdown first, knowing that with a rising gold price, the gold and silver reserves and resource in the ground will only grow more valuable, awaiting the time when the company is ready to return. That time is soon approaching, and once feasibility is completed, a move toward production could take place over a rather short period of time.
SUMMARY & CONCLUSION
Thanks to the business and managerial skills of Rob Martin and the three outside directors who brought in Ken Ripley, Earl Harrison, and a team of very dedicated people at the end of 2004, Golden Phoenix is not only alive but has turned its first profit and now appears to have the potential to evolve into a significant producer of molybdenum. So impressed by this company’s molybdenum project were some of the highest regarded mining professionals in the U.S. that they joined this company.
With their skills, talents, and connections, we think Golden Phoenix may be on the verge of becoming a household name in the mining industry. If I am right about that, this stock at its current price of around $0.30 will in hindsight look like a super bargain. We think this stock could begin to rise dramatically toward the end of this year or early in 2008, provided its moly operation shows continued profitability by the end of the 4th quarter, and provided that exploration efforts begin to demonstrate that a larger deposit exists at Ashdown. And lest I forget, a favorable feasibility study at Mineral Ridge should also add significant value for shareholders. Your editor thought this is one of those stocks we might have to bury along with a handful of others over the years.
We don’t want to promise you unequivocally that GPXM is out of the woods yet. As one director told me in Las Vegas last week, exploration success and continued operating success will assure him that GPXM is out of danger and on to a bright future. This director believes the company will succeed, as do I, based not on the management team in place when I first recommended this stock, but on a new team that is one of the best you will ever find among a junior mining firm. There is every reason to believe that GPXM, which has a miniscule market cap of less than $60 million, can double or triple in value over the next six to twelve months. Assuming continued success, anything short of that will be hard to explain. That said, GPXM still contains considerable risk. As such, we strongly urge you not to allocate more than 5% of your portfolio to this or any other one stock. |
