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Analysis

Diversifying the Portfolio to Minimize Risk

Mon, 10/21/2013 - 14:29

Each phase of a mining project brings with it a different set of challenges. When mineral prices drop there will be a squeeze on companies operating at all different phases of the mining value chain, though junior companies tend to have a particularly difficult time, relying as they do on external sources of investment for their exploration projects. The companies that will be most resilient during difficult times are those that can generate profits and reinvest those in their exploration projects; for junior companies this is made possible either by having at least one property at the production phase, or a portfolio of projects that are either in the advanced exploration stage or are close to reaching the development phase. “Kootenay Silver started off with a two-pronged approach. Our goal from the outset was to acquire an advanced, lower risk property that offered real potential to evolve into a commercial precious metals producer,” says James McDonald, Kootenay Silver’s President and CEO. “Our second target area was project generation. Since there were not many companies doing this at the time, the company was very valuable.”

Kootenay Silver is a Canadian junior company, made up of exploration experts, prospectors, and geologists with a background in finding and developing early stage mining projects in Mexico and Canada. Founded in 2006, the company has a diverse portfolio that includes high risk, high reward properties and more advanced, lower risk projects, with the aim of insuring itself against the fate that is befalling many other juniors in the market. By McDonald’s calculations, it takes around 2,000 exploration projects to find one viable mine, which is why juniors are suffering from a lack of investment. “Today, exploration is driven mostly by the junior companies, and there is little risk-capital available for them. Kootenay Silver’s objective has been to leverage the value we built with the grassroots project generation to create a more advanced stage, lower risk project,” explains McDonald.

For Kootenay Silver this advanced stage, lower risk project is the company’s flagship project in Sonora, Promontorio. “For Kootenay Silver, Promontorio perfectly fits its criteria: it had potential to immediately establish a resource base and had virtually unlimited upside potential for resource expansion,” says McDonald. Promontorio was previously a small scale silver producer, and the part that was previously mined represents only a small part of the whole mineral system. “We went from an initial discovery program of having no resource ounces, to having today over 92 million silver-equivalent ounces, and another 24 million ounces of inferred resources,” adds McDonald. Promontorio is part of a large diatreme complex, which often host prolific metal resources – Goldcorp’s Peñasquito mine in Zacatecas is the largest diatreme deposit in Mexico. “The Promontorio diatreme is very permissive for discovering more resources, and that is why we are so excited about the Promontorio project. We have just released a new resource update that includes the gold component, because although this system is a principally silver deposit, in terms of value it represents roughly 45% silver, close to 30% gold, and the remainder is lead and zinc. We had not previously included the gold component because we did not have the metallurgy to show the potential to extract that gold; our studies have however shown that, after oxidation, the mineral extracts very well with leaching. This gold component has certainly boosted the size of the resource,” adds McDonald. The presence of both gold and silver reflects Kootenay Silver’s own specialization. The company was previously known as Kootenay Gold, but changed its name to Kootenay Silver to account for the fact that the Promontorio property holds more silver than gold – the new name made more sense when marketing the company to potential investors. Both precious metals, however, maintain an important place in Kootenay Silver’s portfolio.

McDonald is confident about the future of silver, and thus the company’s specialization. “Silver, like gold, is a precious metal that plays a monetary role in the global economy. Unlike gold, it is also widely used in industrial processes, particularly in solar and medical applications, which have taken up the slack from the diminished use of silver in the photographic industry over the last 10 years. This double component makes the silver market a very interesting and complicated market, and helps to manage risk,” says McDonald. When asked about his view on the impact of the recent drops in metal prices on the long term

development of the silver price, McDonald emphasizes the need to keep a sense of the bigger picture. “I believe precious metal prices will continue to be strong, because global macroeconomic fundamentals will remain bullish for precious metals,” he says. “Industrial demand will continue to grow, which helps silver. This will be driven by recovering economies throughout the world. Kootenay Silver really has to look at the macroeconomic indicators, and whether gold and silver prices are going to be strong 12, 24 or 36 months from now. I think the answer to that question is yes, we believe the prices will be higher, though we do not know by how much,” he says.

Part of Kootenay Silver’s strategy to remaining strong in the face of this instability is to generate early stage exploration projects internally, advancing them to a certain point, and then bringing in a partner to help finance the project, thus spreading the risk. The company is still finding there to be interest for good partnerships in the industry and recently sold a 10% stake in its Promontorio project to Agnico Eagle. For McDonald, Agnico Eagle’s investment has served as an endorsement of the work that the company is doing. “As an experienced mining operator they can provide us with their complementary technical background and knowledge, while Agnico Eagle can benefit from the expertise of our exploration team in this area of the country. The Agnico Eagle investment is very strategic for us; it removed doubt from our shareholders’ minds, and secured the next several months for Kootenay Silver, without having to take the risk of going back to the market to raise capital. With cash in the treasury, and what we believe are solid fundamentals supporting the precious metals market, we feel we are well positioned,” says McDonald. “Especially now, companies want to be in politically stable and mining friendly jurisdictions where their assets will not be confiscated. After putting a lot of time and capital into finding deposits, and having pursued a lot of other projects before reaching the stage of actually building a mine, companies do not want to see themselves in a situation where the mine can be taken away from them, or where the government does not support the rule of law, resulting in the inability to develop the deposit,” states McDonald. “We have more projects here because we see more potential for discovery, but also because Mexico is politically stable, and a very good place to operate. A lot of large deposits have been discovered in Mexico, including world class deposits. There are going to be many more discoveries made in Mexico in the coming years,” he says.

Kootenay Silver plans to keep its focus on Mexico. The strategy that was used on Promontorio will play an important role in the company’s exploration strategy elsewhere in Mexico. “On the generative side, we work in geological terrains that have potential for large deposits, and we geologically pick that area apart. It is a geology driven process that works very well,” says McDonald. In the short-term, the company’s main goal is to keep moving Promontorio forward towards production, whilst in the meantime leveraging its previous experience and successes in the region to keep making new discoveries. “We are keenly focused on becoming a precious metals producer and generating new discoveries,” says McDonald.