Research Summary for Continuum Resources - written by
Mike Kachanovsky
OVERVIEW:
The company is engaged in the discovery of precious
metals in the Province of Ontario,
Canada and Guerrero and Oaxaca states, Mexico.
Management is strong with
both a geologic background (Lawrence Dick – President & CEO, Arturo
Bonillas – GM Latin America, Chris Osterman – VP Exploration Latin America)
and financial expertise (James Hutton – Director) necessary to advance early
stage exploration efforts. The
company is listed on the TSX-Venture exchange under the symbol CNU.
Approximately 27 million shares are currently issued and outstanding.
About 2.5 million management options were still outstanding as of the
last report for Q3 (October 31, 2003). About
4 million warrants remain outstanding, mostly with a 60 cent exercise price, but
some at 20 cents. The company has
no long-term debt, and had $4 million in working capital available as of
February 17, 2004 – enough to fund their current exploration budget.
Fully diluted the company will have 33.6 million shares outstanding.
PROJECTS:
It seems like almost every aggressive junior PM
exploration company has staked out some territory in the
Red Lake District, and Continuum is no exception, with a continuous
parcel of land across several known high-grade gold occurrences at Richardson
Lake. Previous drilling has
identified intersections as high as half an ounce of gold per ton over more than
9 metres. Rounding out their
Ontario properties is a larger holding in the McVicar Lake area.
Again this property has previous drilling work that identified some
high-grade gold intervals, and channel sampling has outlined new targets for a
future drilling program.
In Mexico, the company was able to lock up interests in
2 highly prospective properties with historic mining activity.
The La Calentana Gold Deposit in Guererro State is 100% optioned to CNU,
and has seen small-scale mining activity working shallow, extremely high-grade
deposits. CNU followed up this
acquisition by acquiring exploration rights to another 4000 hectares of the
surrounding lands, the Pompeya and Capiri properties on which further vein
systems have been identified but no known modern exploration activity has tested
the properties. In
neighboring Oaxaca State, CNU has
an option to an 80% interest in a second property, the San Jose Silver-Gold
deposit. Again this system has been partially mined yielding
production of 400-600 g/t silver and 3-5 g/t gold in previous workings to a
depth of 150m. Considerable
extension of strike has been identified further along trend that has never seen
modern exploration work, and the potential of additional resources at depth is
very high. Channel sampling in the
mine workings assayed 977 g/t of silver over a width of 3.75m. Another property in this district has been recently acquired
by CNU, again targeting under explored high-grade deposits with previous
historical mining activity, the Natividad, with past production of
960,000 oz of gold and 23million oz of silver.
The company has also acquired via staking 100% interests in the Tres
Hermanos and La Crus prospects.
Beginning in March 2004 drilling will test target zones
identified on the Richardson Lake Property. In Mexico an extensive drilling campaign has been planned to
aggressively explore the mineralized structure surrounding the mine workings at
La Calentana with 4000m of underground drilling, and testing the vein extensions
in the newly staked Pompeye and Capiri properties adjacent with surface
drilling. Another drilling program
will be initiated to test the deeper levels of the San Jose deposit.
Still another drilling program has been scheduled for
the Natividad Property in the fall of 2004.
Surface exploration work will continue at McVicar Lake, and will probably
be followed up with a drilling program later in the year.
OUTLOOK:
The expectation of continued commodity pricing strength
in both gold and silver has focused interest on many junior exploration
companies from investors seeking capital gains appreciation.
Due to the effects of a long bear market in junior mining stocks, most
retail investors are new to the sector and have limited experience in selecting
companies to invest in. Mining
stocks have always been leveraged to news, and in the current climate this will
be an important consideration. Investors
must ensure that they choose companies with solid management and well-funded
treasuries, but must also look for exposure to junior explorers that have
aggressive exploration activity to generate a steady stream of news.
As the bull market cycle continues it will become even more important to
remain invested in companies that have been able to secure interests in a suite
of high quality exploration prospects. Mining
exploration is a risky business, with very low probabilities for success so it
is important to have a number of different properties in the pipeline at various
stages of exploration, as it is inevitable that some of the projects will not be
successfully advanced to the production stage.
Continuum Resources appears to be well positioned to
benefit from the renewed interest in junior precious metals exploration
companies. The relatively low
outstanding share float, and small overhang of cheaply priced options will allow
for rapid appreciation of the share price in the event that their exploration
activity results in a major discovery. The outlook for equity offerings to raise capital remains
strong in 2004 after a nearly record year in 2003, and the company appears to be
well positioned to secure additional financing to meet the ongoing requirements
of their ongoing activity, without severely diluting the share structure.
Consolidation within the sector will become necessary,
as many senior producing companies have not maintained exploration activity to
replace the depletion of reserves from mining operations during the bear market.
Those junior exploration companies that control large prospective
property packages, or have advanced deposits to the late exploration stage will
become attractive takeover targets and their share price will carry a premium.
Based on the reasonable expectation for a steady stream
of exploration news, the potential for at least one major new discovery of a
gold or silver deposit, and the expectation that quality juniors will benefit
from a takeover premium as consolidation occurs within the sector, Continuum
Resources appears to be undervalued at current pricing.
Given the historical production records of the Mexican
properties now controlled by Continuum, the fact that they remain largely
untested by modern exploration activity at depth and along strike, and the data
collected recently from channel and chip sampling, there is reason to believe
large deposits of high grade mineralization remain to be discovered.
Several vein systems have been identified at surface indicating
large systems across these properties.
Some recent shallow drilling activity has outlined several intersections
of gold and silver at La Calentana ranging as high as 161 g/t gold over 1.05m, while a drill hole completed at depth on the San Jose Deposit
recovered an average grade of 3.25 g/t gold and 436 g/t silver over a 25.6 metre
interval. Follow up work on these
encouraging results could eventually outline deposits in excess of 1 million
gold equivalent ounces, in line with estimates from many other deposits mined in
the area in the past.
TARGET PRICE:
The advancement of exploration to define an estimated
resource will position CNU to benefit from leverage to increasing commodity
pricing. At the time of this report
CNU hosts a market cap of $26 million CAD.
The market typically values junior explorers in the range of
$50 per estimated ounce of gold resource.
It is reasonable given the high quality property base that CNU has
assembled to put an initial assumption targeting the combined resource discovery
in excess of 1 million ounces gold
equivalent. This would infer a
market capitalization for the company above $50 million, or roughly double the
current pricing. The upside
from the currently budgeted round of exploration could be much higher, but a
target price of at least $1.60 seems reasonable and attainable within a 12 to 18
month time frame.
Disclaimer: I have made my research and opinions available to the public as a resource to provide investors and the public with basic information. My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide. While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed. It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf. I accept no responsibility for the performance of the companies that I feature in my coverage. Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital. Past performance is no guarantee of future success. From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings. I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports. I do not accept compensation from companies as payment to provide positive coverage or opinions