11 March 2006 - Virgin Metals (V.VGM)

Mexico Mike

Virgin Metals works to return historic molybdenum mine to commercial production.

Molybdenum is a metal that is a critical component for many industrial applications, yet most investors would consider it is nowhere near as sexy as gold, silver, or zinc. Like almost every commodity, moly has risen sharply off rock-bottom bear market lows, however few people are aware that the spot price for molybdenum has actually outperformed just about every other metal over the last few years.

Since there is no futures market for molybdenum, thus keeping speculators out of the picture, the market performance for moly is strictly driven by fundamentals. And the fundamentals are good… very good in fact. With worldwide demand expected to continue increasing, and only limited new supplies projected to reach the market for at least another 2 years, the high current price for the metal is an incentive for junior mining companies to accelerate development of projects that could begin production in time for them to cash in.

That is exactly the game plan for an ambitious Mexican junior, Virgin Metals Inc. The company controls a 100 percent interest in the Los Verdes property, located in southeastern Sonora State. A former producing moly-copper project, Los Verdes has the advantage of information from previous operators that indicates large historic resources remain at the mine to be exploited. This information is not considered compliant within the guidelines mandated by NI43-101 requirements for reporting, but it should be noted that the past exploration work was completed by Industriales Penoles and Cominco Ltd, two senior mining companies that know a thing or two about defining deposits, so a high degree of confidence can be attributed to the potential deposit.

Virgin is currently completing a 6,000-metre reverse circulation drill program, with the objective of confirming the historic resource estimate for the property. The company expects to prove up a deposit of more than 6 million tonnes, grading an average of 0.86 percent copper, 0.16 percent molybdenum, and 0.135 percent tungsten oxide, and the results of the drilling program will allow for a fully compliant resource estimate to be prepared.

I was able to visit this mine in September and came away with a strong impression of the potential for the entire project. The deposit occurs along a prominent ridge in an area of sharply incised terrain, which is part of the prolific Sierra Madres Occidental physiographic region. It is adequately served by paved road access, except for the last few kilometres to the property that are more of the usual teeth-jarring roller coaster ride one expects to find on the local gravel roads with limited maintenance.  A hydroelectric transmission line was under construction nearby, ensuring the potential for a low cost power extension to the property.

A small open pit remains from past operations, which were suspended in the early 1960’s after perhaps 100,000 tonnes of ore had been processed. There was also an adit driven into the hillside, accessing a higher-grade vein structure where I was able to observe extremely rich veining across an interval of several metres, containing visible lenses of molybdenum along with sulphide mineralization, massive pyrites, and secondary copper minerals. The company is currently performing underground sampling to establish metallurgical parameters.

The host rock formation is rich in sulfur, which when oxidized, combines with ground water to form highly acidic solutions. The deposit area has undergone intense alteration, as weathering and oxidation acted on the near surface mineralized zones, allowing copper to become dissolved and transported in ground water, to precipitate out into an enriched zone at the water table in a process of supergene enrichment. In fact, during my visit, puddles where rainfall had accumulated were actually stained a bluish-green hue due to the presence of dissolved copper, nicely emphasizing the effect. After this process continued for many thousands of years, a very rich deposit now awaits development at Los Verdes.

Project geologists are working under an exploration model suggesting that the deposit was emplaced as epithermal fluids from an underlying granitic intrusive flowed into heavily brecciated zones along the major fault system trending across the property. Or, to put that description into layman’s terms, high grade mineralization was emplaced into extensively fractured rock to form a higher grade core, which in turn is surrounded by a wide zone of lower grading, finely disseminated mineralization. Mother nature has concentrated that zone during a long period of time and as a result oxidation, has created one honking high-grade deposit.

An appealing aspect to this framework is that if in fact the fault structure acted as a conduit for mineralizing fluids, then the possibility exists for other similar deposits to have been formed elsewhere along the axis of the fault.

The property area controlled by Virgin amounts to nearly 58 square kilometres and remains largely unexplored, so there is certainly intriguing upside discovery potential once the company learns more about the geology of the deposit and has the opportunity to complete a more regional-scale work program.

Virgin intends to carry out an aggressive development program in order to put the mine back into production as quickly as possible, to capitalize on the high moly and copper prices. A small start up operation is planned, along with the construction of a processing and recovery plant capable of handling between 200 and 300 tonnes of ore per day. Assuming metal prices remain in the current range, and the company is able to achieve reasonable recovery efficiency at the plant, an operation on that scale could be projected to generate positive cash flow in the range of CDN $500,000 per month.

Longer term plans call for the construction of a much larger plant, to increase capacity up to 3,000 tonnes per day. Such an expansion would be expected to greatly reduce operating costs on a per tonne basis, while generating impressive operating revenues. The company could then embark on an extensive exploration program to pursue additional resources that may be hosted elsewhere on the property.

Virgin also controls the large, early stage but highly prospective Cuatro Hermanos (Copper Mountain) property in Sonora. Drilling data from the project suggests that an enormous copper-molybdenum porphyry deposit may be hosted within an area of interest that has been outlined at surface, amounting to several square kilometres. This would represent a high magnitude discovery that adds tremendous speculative appeal.  The project is currently on the backburner while activity is focused at Los Verdes, but it will no doubt factor into the longer term plans for the company.

The management team behind Virgin stands out with competent, respected, and experienced professionals. Company president Christopher Davie is a mining and metallurgical engineer with a resume of successful mine development and plant construction. Keith Brogoitti, with a background of management experience in the development of several international projects, has been recently appointed as Operations Manager, Mexico. Along with a talented field team overseeing the exploration work, this company is well staffed with the essential personnel that can enable it to surmount the challenges that inevitably arise along the path as a mine is put back into production.

The company is also well represented by individuals with financial backgrounds, who assisted with an equity offering completed earlier in the year to successfully raise approximately $5.7 million.  This provides the funding necessary to allow the first phase of development work to be completed. The fully diluted share structure for the company now stands close to 74 million shares, which is at the higher end of the range that I consider for a junior in my investment criteria. Given the strong cash flow that the company is capable of generating in short order, and the robust commodity cycle that the market currently enjoys, I believe significant upside potential still remains for investors as Virgin advances along its business plan.

The overall awareness level among investors for Virgin is probably very low right now in respect to the potential this little company has to offer. Much of that is due to a limited scope of active promotion at the current time, but it is much easier to launch effective promotion than it is to find a great resource prospect, so the outlook to remedy the situation is certainly encouraging.

There are few options available for those seeking exposure to primary molybdenum producers. The stock market behaves like any other market, in that a restricted supply of shares along with growing demand as money flows into the sector, will result in higher share price multiples for these select companies. I expect that as new interest is directed towards the stock, and a more reasonable asset value for Los Verdes is discounted into the market capitalization, the shares may rapidly appreciate to a level above $1, which amounts to more than a tripling of the current share price.

On the basis of a strong, tested management team that is advancing a solid project, with a high probability of defining a large, high-grade resource, along with the security of a well funded treasury to enable the company to rapidly advance to production, I buy $10,000 of Virgin Metals for the Mexico Mike Portfolio.