ExGen Resources (TSX:V.EXG, Stock Forum) announced its second ‘prospect generator’ JV deal two weeks ago when it signed an LOI with Phoenix Global Mining for that company to take an 80% interest in the Empire Mine Project.
For a lot of prospect generators out there, this would be a nice deal and the share price would enjoy a little bump. After all, such deals are what prospect generators do.
But ExGen is positioning themselves as more a project incubator than generator, and that’s going to take some explaining to the markets.
So who better to explain it than CEO Jason Riley?
“I am a real proponent of both the royalty and prospect generator business models in the mining space,” said Riley Monday. “But we saw an opportunity in this dislocated market to pursue a hybrid approach. To build a company that focused on more advanced properties than a traditional prospect generator, but that is not yet at the stage of a cash flowing royalty company.”
“We are positioning ExGen in the middle between a typical early stage prospect generator model and a cash-flowing royalty model. This diversified stage PG model - we are calling it a project incubator strategy - is reflected across our project thinking. So with ExGen you now get diversified exposure across the exploration stages: from our available portfolio, to the DOK and Empire deals, and new targets that we are continuously evaluating. We still see this as just the beginning. Next we’ll be looking at further commodity diversification too.”
Riley says the markets, as they stand, make the hybrid option more attractive.
“The royalty model is truly fantastic,” he says. “But the hurdles to get there from scratch are nearly insurmountable right now. To effectively launch a new royalty company requires raising significant capital and then comes the hard part of building a portfolio of royalty assets at attractive valuations. So we knew that was not going to be a viable short-term path considering the lack of capital out there right now.”
“The challenge I see with the PG model is that you need to assemble a large land inventory of early stage properties to attract partners. But usually you can’t get a partner to take the risk with you until you have proved up drill targets. So you are often stuck doing the geophysical work yourself.”
This was factored in as part of the rationale behind ExGen’s acquisition of Konnex back in 2013, which brought Riley to the company.
“We saw an opportunity to build a significant portfolio of copper assets across the exploration spectrum, from grass roots all the way to near term production with our Empire Mine. So now we have really validated all that strategic planning with the Phoenix deal on Empire.”
Riverside Resources (TSX:V.RRI, Stock Forum) boss John-Mark Staude told me six months ago, “It’s easy to say you’re a generator. And it’s easy to go claim mineral rights on some land. The hard part is the deal, the actual getting of a partner to agree to take on the risk. Not everyone can do that.”
With the Empire deal, ExGen now has two projects under option, building on their $6.2M option deal on the DOK project with Continental Precious Minerals (TSX:T.CZQ, Stock Forum) from last year.
ExGen was formerly Boxxer Gold, and Boxxer Gold was loaded with copper plays at exactly the wrong time, and with not a lot of cash to pivot or push through with one. Execs weren’t paying themselves, preferring to stay tight and efficient while they figured out the next strategy.
That strategy has been to take advantage of their strength, which was a deep portfolio of potential projects, by seeking JVs and/or acquisitions. Really, it was the best possible move, perhaps the only move.
And the Phoenix Global news shows the ExGen crew weren’t just talking the talk. They’re not at third base yet, but they’re halfway to first, and in good time.
Trading volume isn’t there yet, and it might not be for a few news releases more. But ExGen isn’t panicking. Cash burn is still minimal - execs are paying themselves now, but still a pittance compared to the competition. And though copper has been in such a rut of late, ExGen has a ‘why copper’ page on their website, to argue the point that the commodity is undervalued.
It is. Few would argue that point.
But the bigger question is when will it be back?
This chart shows you the copper commodity price from the last 12 months. It has an interesting uptick going on…
Well, hello Mr Rebound.
Getting a deal in copper plays, right now, is like cheating in the Special Olympics. It’s too easy. Share prices are destroyed. Volume is nothing. You can vacuum up deals for a bag of stale bread and a lift to the train station, and as that copper price gets back near US$3 per lb, it won’t take much activity to take a company on a run.
So let’s take a look at the ExGen/Phoenix deal:
Empire is a former copper-gold-silver producer in the middle of sunny Idaho. It’s previously cranked out 694k tonnes grading 3.6% copper, 1.6 g/t of gold and 53.9 g/t silver, back in forty years of work that ended in 1942.
ExGen keeps a 20% carried interest until the mine starts construction, and they get a 2.5% net smelter return. They also get 10m shares in Phoenix, which is tough to put a dollar figure on because that company is private.
Importantly, ExGen also negotiated a 30 mile area of interest clause that provides them with upside participation on any regional exploration success. Phoenix also has to stick $1m in to the mine to earn their 80%, and finance all ongoing maintenance and sustaining costs.
Phoenix is very capable of making all that happen. In fact, odds are they’ll walk it in. The Phoenix team took Nelson Gold to an 80k oz p/year gold producer. Then they founded AIM listed Oxus Gold, proved up over 7M Oz of Au, and took the mine to production in Uzbekistan. Chairman Roger Turner has been in the game for the best part of four decades.
Phoenix, for the record, aren’t chumps in this deal. They’re getting a good arrangement, no question. If there’s anything to be picked through at Empire, they won’t feel the cost of this deal a bit.
For ExGen, they significantly lighten their ongoing costs and hopefully advance their flagship Empire Mine along the path to production. When that million is sunk into the ground, if good data comes forward, that 20% ExGen continues to hold will be worth far more than the 100% they had last week. Low risk, high reward move.
And ExGen still has four other plays to move forward.
Naysayers look at the $0.02 share price and shrug. But consider this: There are 319m shares in ExGen out there, and when the company did just 4.5m trading volume in August of last year, it ran from $0.02 to $0.05.
If they rolled the shares back to a market-pleasing 31.9m shares in a 10:1, you’d be looking at a $0.20 share price, which nobody would be sniffing at in this market. That such a rollback hasn’t happened yet is a gift to you, the investor who would like to make 25% profit on every half cent nudge.
I’m not going to suggest ExGen is running to a buck in the next few months. It might not run to $0.10 in that time. But if it has one good news day in the next several weeks, and it’s working hard to make that happen, $0.02 is a lovely launchpad.
The Phoenix deal is a good one, and it brings with it the confirmation that ExGen is doing what it needs to in order to be seen as a legitimate prospect generator moving forward.
“This is a pivotal milestone for ExGen,” says Riley. “We have spent the past 18 months restructuring the company. We have reduced overhead, launched our new joint venture business model, and rebranded as ExGen. This is a unique deal with the intent of driving the company towards cash flow visibility.”
--Chris Parry
https://www.twitter.com/ChrisParry
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