Research Summary for
QGX Ltd. - written by
Mike Kachanovsky
I believe that QGX Ltd. is “a better Ivanhoe Mines” and the best way to play the emerging discovery zone for precious and base metals in Mongolia. QGX was the first western exploration company to come to Mongolia and is 100% focused on the country in their efforts. Mongolia was one of the hottest regions for precious metals exploration in 2003 and I believe it will continue to be a hotspot for investors in 2004. I own shares in QGX.
QGX Ltd. is a Canadian junior exploration company that trades on the TSX-Venture exchange (QGX). As the first western-based junior explorer to establish a presence in Mongolia they were able to secure the rights to large property interests in the most promising districts to discover high-grade mineral deposits. Ten years of active exploration has resulted in a detailed knowledge of the mineralization of the area while management built a working relationship with the local regulatory agencies. Mongolia is considered a politically stable country to do business in, and is pro-mining.
Management of this small company has been directly
involved in project development in Mongolia since the inception of the
company. The CEO, Mr. David Anderson
has 30 years experience as a geologist with a background in advanced geoscience
technologies, and his work helped to identify the high quality suite of
properties under license by the company.
Mark Wayne, the CFO, and Chris Johnstone, the Manager of Mongolian
Operations, have also been part of the company since it’s beginning. Patrick Redmond, the Chief Geologist has a
background in planning early stage exploration work, drilling and sampling, and
has field experience in nearby Kazakhstan.
Paul Zweng, the COO, has worked with developing large, grass roots
projects to the mining stage, and has contacts in investment finance. In summary, the management is experienced to
identify and bring to development the deposits that could exist on the property
base.
The share structure is limited to only 35.2 million
shares fully diluted, and Barrick Gold has subscribed to own approximately 9.5%
of the company through a PP agreement that provided QGX with the liquidity to
fund aggressive exploration on several of their properties. Working capital is approximately $18
million, sufficient to fund the exploration activity for the foreseeable
future. The company has no long-term
debt.
Because QGX was the first junior explorer to establish a presence in Mongolia, they were able to assemble massive property holdings in the best areas of the country for a major discovery. Most similar areas of the world that host potential mineral reserves are a patchwork of smaller claims. QGX has assembled a land package in excess of 30,000 square kilometers across Mongolia. The highest priority project is a 7500 square kilometer property known as the Golden Hills project. Several zones have been identified with significant gold and silver intersections, as well as a near surface copper zone grading over 2%. An encouraging report has been released after metallurgical studies confirmed the ore from this area yielded up to 75% gold and 50% silver recoveries with standard refining techniques for coarse crushed feedstock. Work is currently underway to produce a resource estimate and this should be completed by the summer of 2004. In the Northeast section of the country QGX controls the Onon property, a 750 square kilometer package near the Russian border and in close proximity to the estimated 20 million ounce Baley gold deposit. Drilling is currently underway, following up geophysical surveying work to identify targets. The Erdene Tolgoi property in Eastern Mongolia is a copper-gold porphyry target that has similarities to other discovery zones further along trend in Central Mongolia. The Uhaa Hudaag property is another high profile discovery area for high grade gold, occurring along parallel veins. Visible gold has been observed in quartz veins, and drilling in 2003 uncovered 33 intersections of 1 g/t gold or better, the highest grading 26 g/t over 1 meter. A drilling program has been scheduled to commence in the spring of 2004 to further test the mineralization.
QGX is also involved in joint venture projects with
Ivanhoe Mines, for carried interests between 10-20% on three properties as
Ivanhoe funds the exploration on the properties.
2003 was a breakout year for several junior
exploration companies focused on Mongolia, the most notable of which was
Ivanhoe mines, exploring their massive deposit at Turquoise Hill. This resulted in a frenzy of investor
interest in the region and almost any company associated with Mongolian
exploration saw rapid increases in share price. With the interruption of widespread exploration activity during
the winter months, many companies, including QGX, saw interest wane and share
prices dropped. QGX has not been
inactive however, and continued with drilling and exploration activity. During the spring of 2004 investors can
expect to get news of assay results from ongoing drilling at Golden Hills, and
the last few holes drilled at Onon and Erdene Tolgoi. Junior companies are leveraged to news and if the results
released are as encouraging as those from the previous drilling work, this should
result in gains in the share price and renewed investor interest. Work is also underway to list QGX on the
Toronto Stock Exchange, which would be very positive for investors as it would
increase the liquidity for the stock, and would make QGX margin eligible for
many investors.
Compared to its peer group in the region QGX remains
undervalued by a significant margin.
The current market capitalization is only $170 million fully diluted,
compared to the 500 pound gorilla of Mongolia, Ivanhoe Mines with a market
capitalization of approximately $2.4 billion.
The low outstanding share issue for QGX means that it is leveraged for
rapid appreciation if the company can continue to post impressive discovery
results from their properties. A
resource calculation is due out in the summer of 2004 that will stand as the
yardstick for comparison. Investors are
typically willing to value junior explorers in the order of $60 per ounce of
gold resource, which infers a discovery potential from all of the properties in
the order of roughly 2.8 million ounces of gold equivalent resource. The Turquoise Hill project operated by
Ivanhoe is estimated to contain over 17 million ounces of gold alone, and
several other multi-million ounce discoveries are located in proximity to QGX
properties, so the potential is not unreasonable that ongoing exploration work
will uncover larger deposits on QGX properties.
The direct investment in QGX by Barrick Gold should
also be factored in. Barrick has done
very little exploration work to replace their gold reserves and will be forced
to acquire other properties in the future in order to maintain production
levels. They may opt to participate
directly in a production decision in Mongolia, or acquire QGX outright, either
of which would increase the speculative premium priced into QGX shares.
The shares of QGX achieved a peak valuation of $7.30
in 2003. The prices of gold and silver
are expected to continue rising to higher levels by many analysts, and this
brings the attention of a larger pool of investors to the junior precious metals
exploration sector. QGX has several
active exploration projects underway, and if they continue to confirm earlier
exploration success, or discover new high-grade zones on their properties, the
valuation of the company’s shares can be expected to increase. A target price of $10 per share, roughly
doubling the market capitalization is within the range that investors can
expect in a 12 month time frame.
The risks associated with the projects should not be
ignored. Mongolia is a lesser-developed
country, with limited infrastructure, or access to water and power necessary
for a major mining operation. This
would increase the costs of development should a major discovery be identified,
and increase the time for development to a producing mine. Management at QGX has very strong
exploration background, but one must question their abilities regarding
engineering and development of mining operations should they elect to advance a
property to a mining stage. Many other
junior explorers have encountered difficulties as they attempted to change
their focus from one of exploration to becoming an operator of a mining project
in difficult circumstances. One must
also factor in the high additional dilution that would result, as share capital
would be the most logical approach to raise the funds necessary for a mine
development program. QGX management
have expressed the desire to proceed to the development of an operating mining
company if they uncover an economic grade deposit, so this will bear close
scrutiny as the projects are advance.
The keys for success in junior exploration for mineral
deposits lie with strong, focused management, and access to highly prospective
properties. QGX meets both of these
criteria. The odds are strongly against
a company discovering an economic deposit from the grass roots stage through to
the mine development, and QGX has a number of very good prospects in the
pipeline with encouraging results. With
their aggressive approach to advancing their projects and well funded treasury
they can be considered a lower risk alternative for investors looking to
participate in the junior exploration sector, and remain leveraged to upside
potential through the discovery of a major new deposit.
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