Falco Pacific Group (FPC.V) released its maiden resource estimate at the Horne 5 mine a few months ago, but the market reacted disappointed. As we think the current share price doesn’t really reflect the fair value of the company’s assets, we sat down with Dean Linden, responsible for Falco Pacific’s Corporate Development team and asked him some questions. As Falco Pacific has approximately C$6M in cash and as we are expecting an updated resource estimate later this year containing at least 4 million gold-equivalent ounces (as higher recovery rates and a higher tonnage are expected, combined with adding the silver component to the gold-equivalent calculation), the company’s current enterprise value of C$29M does not reflect the fair value of the Horne 5 asset and the surrounding land package.
– As the Horne project is an underground project, some people might be disappointed with the average grade, which seems to be quite low for an UG mine. How helpful will the existing infrastructure be to make this mine viable?
First of all, everything you can imagine is already on site. There’s a smelter nearby, there’s power, there’s water and there actually is a mill on the property as well. So our situation is completely different from a company which would have to build its infrastructure from scratch. Keep in mind that using a NSR cutoff of C$80/t, we ended up with 2.8 million gold-equivalent ounces at an average grade of 3.41g/t AuEq which is a rock value of in excess of C$155/t.
– Are there any issues with water in the old mine? Will de-watering be a problem because of the large quantity? What about the quality of the water, will you have to treat it before disposing of it?
There will indeed be some water treatment challenges, but let me be clear we feel like we are certain this problem is manageable. Don’t forget we are currently already de-watering the mine as the first 300 meters of Horne have now been dewatered, and we didn’t encounter any problems to treat the water before disposing of it.
– InnovExplo used a recovery rate of 65% for the copper and 37% for the zinc in its resource estimate. Do you think Falco Pacific will be able to increase those recovery rates? There’s also a lot of potential at depth and around the Horne 5 mine for future resource expansion. Will this be something you’ll look into in the near future, or are you only focused on Horne 5 at this moment?
Absolutely. The reason why InnovExplo used those recovery rates is because those were the historical recovery rates back when Noranda was mining the property. It goes without saying that in the past few decades a lot has changed on the metallurgy-front, and we expect substantially higher recovery rates for the copper and the zinc now. This will eventually lead to a higher average gold-equivalent grade for the resource estimate and will remove any doubts about the grade of Horne.
There’s indeed considerable potential for a resource expansion, and we are currently assessing the data of an additional 6,600 historical drill holes on the property. This should allow us to get an even better understanding of the structure at Horne and could additionally lead to a larger resource estimate. Additionally, one cannot underestimate the potential at depth. Don’t forget Agnico Eagle (AEM.TO; NYSE:AEM) is currently producing at the nearby Laronde mine at a depth of more than 2,000 meters and there’s no evidence this won’t be the case for Horne as well.
– What’s your current cash position right now, and how far will it take you?
We are one of the better junior exploration companies out there, as we still have approximately C$6M in cash, and this will allow us to get through 2014 as re-assessing 6,600 historical drill holes isn’t expensive at all. Keep in mind this first NI43-101 resource estimate has cost us just C$500,000 which is very cheap. As our all-in burn rate is approximately C$400,000 per month, we don’t have to go to the capital markets anytime soon to re-finance, so we’re in an excellent shape.
We will very likely bring out an updated resource estimate before the end of this year and as we will incorporate the updated recovery rates, more drill holes and add the silver component to the resource estimate, we have several pillars which will very likely cause the resource estimate to grow substantially.
– What would you like investors to focus on?
The Horne complex is actually a fresh look at an old mine. Horne 5 is simply one of fourteen past-producing mines to be looked at, as well as hundreds of additional exploration targets. Our low cost exploration business model is powered by over 4 million meters of digitized drill data as well as another 10,000 drill holes in the analog database. The exploration potential is incredible and could be exploited for just a fraction of what such an extensive exploration program would usually cost.
I have no doubt Horne 5 will get significantly larger as we begin to include the additional inputs (the updated recovery rates, adding the silver values into the model,…). With this first resource estimate, we have proven that the data is valid and definitely increases the likelihood that additional discoveries will be made. Also keep in mind the old Horne 5 mine is less than 1% of our total land package.
Disclosure: The author holds a small long position in Falco Pacific and intends to increase this position. Please see our disclaimer for current positions.