Bottom-Fish Comment - August 3, 2012: Bottom-Fish Strategy for Homestake Resource Corp
Homestake Resource Corp was recommended a low priority bottom-fish buy in the $0.30-$0.49 range on July 13, 2012 based on its ongoing effort to establish the economic feasibility of the gold-silver resource on its 2,585 hectare Homestake Ridge property in northwestern British Columbia. The priority was ranked low because the company is in the midst of conducting a private placement at $0.20-$0.25 to raise $4.5 million towards a 2012 delineation drill program on the South Reef zone discovered in 2011 (10 million flow-thru at $0.25 and 10 million units at $0.20 with a full $0.30 warrant). Although completion of this financing would boost fully diluted to 51,541,109 shares, it would also position Homestake for a new speculation cycle involving its flagship project on which it has spent more than $30 million since optioning it from Teck-Cominco in 2003. As of August 2 Homestake had closed an initial tranche of $1,050,000, sufficient to initiate a 2012 summer drill program that will follow up the South Reef Zone discovered in 2011 with 3 closely spaced holes. Homestake is a bottom-fishing opportunity because in 2012 management pulled the plug on a share structure that had become too unwieldy to finance a flagship project that needs $2-$4 million in drilling to sort out a new zone discovered in 2011, and then considerably more capital for feasibility related work on the existing resource which management currently envisions as a 2,000 tpd underground mine.
Homestake has its roots as an IPO on April 25, 1989 since which this unfortunate junior has undergone four rollbacks representing 490:1 for the original shareholders. This may sound like a dreadful statistic, but it is wholly consistent with a green philosophy that favors recycling spent corporate vehicles over manufacturing capital pool shells from scratch; the latter practice is favored by a cynical establishment which treats investors as suckers who exist to be fleeced once and then flushed down the toilet. Don't get me wrong; the current management group is not a recycling fanatic. It is responsible for only 2 rollbacks, 7:1 in 2002 which launched the Homestake Ridge speculation cycle under the banner of Bravo Ventures Group Inc (after giving thumbs down to Larry Page's attempt to unload that black hole of all successful lawyers, a personal winery), and 10:1 on April 16, 2012 which represents a capitulation reset for everybody. During this period Homestake assembled and drilled numerous prospects in Nevada under the guidance of Joe Kizis, which were spun out in late 2009 as Bravada Gold Corp, while exploration VP Rob MacDonald guided work on the Woedwodski VMS play in Alaska (dropped due to poor results) and the flagship Homestake Ridge project where the goal was to discover another Eskay Creek style gold-enriched VMS system.
Homestake spent more than $30 million on 239 drill holes (66,283 m) to delineate the Homestake Main and Homestake Silver deposits, which together have an indicated and inferred resource of 722,000 oz gold (3.7-6.7 g/t) and 14.8 million oz silver (47-123 g/t). The property has tantalized explorers since the early 1900's with its various showings of polymetallic mineralization, but Bravo Ventures has done the most work to try to understand this prospect which is located 5 km north of the Dolly Varden camp where Dolly Varden Silver Corp hopes to prove Paul McGuigan's Big Anomaly thesis that the historic high grade silver zones are peripheral to a VMS monster system that will dwarf Eskay Creek. Success on the Dolly Varden front would generate considerable interest in Homestake's 62,300 hectare Kinskuch project which surrounds Dolly Varden and in which Homestake can earn 100% by spending $3 million before 2015 and paying $2 million. Given the desperate times the two management groups do not yet see the synergy between the two plays and thus engage in the time honored exploration sector practice of peeing on each other's stories. But that will likely change if we do get a discovery cycle going, and the market warms up to the idea of repeating the Eskay Creek discovery cycle that entertained us during the bear market of 1988-1992.
Work at Homestake Ridge has been hampered by steep topography, complex geology, and an unclear understanding of the geological model that defines the two zones (a stepped series of stacked lenses transitioning between VMS and epithermal styles with variable mixes of precious and base metals). Although the existing resource is high grade, and metallurgical work suggests good recovery for a milling-flotation flow-sheet, the resource falls short of the critical mass that attracts mine development capital. While mine engineer Fred Sveinson tries to figure out the best mining scenario for the existing resource, Homestake's focus during 2012 is to see if the 3 closely spaced holes that hit high grade gold-silver in 2011 within the new South Reef zone to the southeast of the existing resource are part of a potential new resource approaching 1 million ounces gold. MacDonald sees South Reef as part of a 4 km structure on whose surface all sorts of goodies have been prospected but never systematically drilled. (Tunnel vision is that affliction of geologists which allows projects to be recycled endlessly so long as a new set of geologist eyes which can see beyond what is already documented can be mobilized. In this case Rob MacDonald got his eyes checked and donned a new pair of glasses.) Towards this new goal Homestake is embarking on a 10,000 m $5 million drill program in early August of 2012 even though it has raised only $1 million for its empty treasury. Although Joe Kizis and Larry Page are president and chairman respectively, the marketing brains behind the scenes is Bob Swenarchuk, officially a "technical advisor". Swenarchuk is a Vancouver old-timer who is supposed to be retired, but who can never enter his greenhouse to tend his tomatoes without his cell-phone ready to field calls from his network. No wonder Homestake's receptionist refuses to give out his contact info. What we have here is a serious case of unfinished business, the sort that breeds legendary discoveries.
The hero's journey, however, has its mandatory trials. The rollback not only wiped out investors, but it reduced the insiders to odd lot positions. But insiders did participate in the first tranche, in which only one broker, Tom Seltzer, who believes in the Big Anomaly, participated. When insiders participate in a private placement largely shunned by brokers, that is a good sign. When I complained to Swenarchuk that insiders only bought about 75,000 units each, he silenced me by pointing out that Larry Page still owns his winery on Saturna Island. Swenarchuk thinks he can close at least another $1.5 million but does concede that perhaps it is time to attract a major as a partner who will do the heavy lifting for the next stage of the Homestake Ridge project. Meanwhile Homestake is taking the capital it raises and risking it on South Reef in the hope that by late September it can report hot intersections demonstrating that South Reef has size that deserves delineation drilling next year that Homestake will be able to fund on a 100% basis. The bottom-fishing strategy is thus a bet that drilling this summer generates a new discovery play at Homestake Ridge which could bring the overall project resource to development critical mass, or, failing that, Homestake secures a partner who likes this sort of underground high grade gold-silver system, in which case Homestake becomes a sleeper development story hopefully bought out at a premium to bottom-fish prices by the partner. However, if Homestake retains 100% of Kinskuch, that early stage play which also hosts numerous unresolved showings, this bottom-fish bet can serve as a risk free bet on the Big Anomaly success of Dolly Varden.