Spec Value Hunter Comment - July 31, 2012: Lithic attracts new stakeholders
Lithic Resources Ltd has raised $750,000 through a private placement of 15 million shares at $0.05, most of which was taken down by George Ireland's Boston based Geologic Resource Partners LLP, a hedge fund that sometimes acquires major positions in resource juniors. Upon closing of the financing on July 30, 2012 two directors resigned and were replaced by Wayne Hubert and Kerry Curtis. These are both very important developments for Lithic which has been stuck in a rut since 2010 when it delivered a PEA for its Crypto zinc-copper-indium project in Utah which indicated that at base case prices of $1.10/lb zinc and $2/lb copper the underground mining project needed more of its higher grade sulphide tonnage to be viable. The message we got was that a prefeasibility study involving an underground bulk sampling program costing at least $25 million was the next step, but one that should be only undertaken if much higher zinc prices than $1.10 had become the new accepted reality, or, as an interim step, a $3 million exploration drilling program had delivered the extra grade and tonnage needed to make the project feasible in the $1.00-$1.10 zinc range. This program would look for additional tonnage laterally, and poke a few very deep holes to see what is geologically going on at depth. Crypto is a major skarn system whose payload is such that it is likely peripheral to a monster porphyry system, though one likely too deep to be accessible even by block-caving methods. We have not, unfortunately, had a market overly receptive to expensive deep wildcat drill holes, so the stock has floundered during the past couple years as a CEO not particularly gifted in table pounding stock promotion tried to pitch Lithic as the smart investor's advance bet on an imminent zinc bubble to a skeptical audience stuck on the notion that zinc is always in the sink. But last year in my Bottom-Fish Comment - March 14, 2011 I presented a discounted cash flow analysis which ran the Crypto model at various metal prices and included a credit for gold and silver which reported to a bulk sample but was not part of the 43-101 resource estimate. At the base case prices Crypto needed $2/lb zinc to generate NPV per share targets above $5, but when the prevailing spot prices for the other metals were substituted while holding zinc at $1.10 a target above $3 was generated.
It thus should have been possible for Lithic to raise $3 million and get its exploration program done while we waited for the zinc bull to arrive, but the company had a handicap in that only one individual, CEO Chris Staargaard, did any meaningful work, and, as mentioned, he is a rather conservative mining executive. The rest of the board owned zilch and had such contempt for the company that none bothered to participate in an $0.08 private placement done in early 2011. This "lack of skin the game" problem now seems to have been solved. Geologic has the capacity to invest more capital and encourage a network of other capital sources to invest. But more importantly, the new directors have very good track records that includes hands-on experience running successful juniors with advanced projects. Kerry Curtis was CEO of Cumberland Resources Ltd until it was bought out by Agnico-Eagle in May 2007 at nearly $8 for a valuation of $636 million. Wayne Hubert worked more than a decade in investor relations for Meridian Gold Inc, and was CEO from 2006-2010 of Andean Resources Ltd which Goldcorp bought out for $3.6 billion at $6.56 in September 2010. Curtis and Hubert are too accomplished to waste time as nominee directors of a junior trading below a dime; I suspect they will play meaningful roles and the key will be whether they show up as having participated in the nickel financing when the TSXV publishes the approval notice in a few weeks. Still missing is a game plan with regard to the next work at Crypto and how it will be financed. I am optimistic that the market will recognize that their arrival along with Geologic, despite the dilution, fixes a major missing piece that deserves a higher stock price at which the other $2.5 million that Crypto needs can be raised. Lithic continues to be a Good Relative Spec Value Buy at the current price level.
*JK owns shares in Lithic Resources Ltd