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Queenston Mining Inc.
(QMI-T: C$6.99)
Idea Support
June 8, 2011
BUY, Speculative Risk*
12-month target price: C$10.00
Ron Stewart, Head of Research / (416) 350-3395
rstewart@dundeesecurities.com
Joseph Fazzini, CA / (647) 428-8248
jfazzini@dundeesecurities.com
Drill and Ye Shall Find…
RiskSpeculative52-Week RangeC$ 3.20-C$ 8.07Shares Outstanding (MM)77.8 Fully Diluted Shares (MM)77.8 Market Capitalization (MM)C$ 544Ave. Volume (000 shares/day)130 Working Capital (31-Dec-10) - (MM)80$ Value Cash, ST Inv. (31-Dec-10) - (MM)63$ Dundee Assumptions2010A2011E Long term Gold Price(US$/oz)122614761075FX(US$/C$)0.970.990.90Valuation (C$/share)2012E - 5% DCF Corporate ValueC$ 7.982011E Year-end Cash etc.C$ -0.042011E Additional Resource ValueC$ 3.66NAVC$ 11.60DCF Multiple0.8TargetC$ 10.00Earnings and Cash Flow (C$/share)2010A2011E2012EAdjusted EPS-0.05-0.11-0.09CFPS before WC-0.04-0.06-0.05All Figures in C$ Unless Otherwise Noted
Source: See Note 1
QMI: Price/Volume Chart
Source: Thomson ONE
Company Description
Queenston Mining Inc. is an exploration gold mining company focused in the Southern Abitibi gold province at Kirkland Lake, Ontario. The Company's goal is to return to producer status through the development of the wholly owned Upper Beaver, McBean Anoki and Upper Canada deposits. The Company is also exploring the new South Mine Complex with joint venture partner Kirkland Lake Gold Inc.
Drilling Continues to Support Resource Expansion Possibility
Yesterday, Queenston Mining (QMI) announced the results of 44 additional drill holes from its 100% owned Upper Canada property in northern Ontario. We note that these results represent the first set of drilling results since the release of the Upper Canada resource estimate at the beginning of May. In short, we believe that both the infill holes within the initial pit resources and the step-out holes provided encouraging results which support excellent resource expansion possibilities.
Drill and Ye Shall Find; QMI Discovers Northland Zone
Stepping out of the mineralized corridor (as described in Figure 2) as defined by the company, QMI identified an additional gold zone to the west. This new zone, the Northland Zone, returned highlight intercepts of 103.8m of 0.55 g/t, 14.6m of 1.3 g/t and 21m of 1.54 g/t.
?
There is little doubt in our view Upper Canada is proving up to be a sizeable mineral system. This bodes well for a continued discoveries and possible surprises on the up-side. We note that Upper Canada operated as a successful underground mine from 1936 to 1972, producing around 1.5 million ounces at an average grade of 11 g/t. What we see in the data is good potential for a bulk mineable, combined open pit - underground operation with some sweet spots to boot!
Extending North and South Branches
?
The recently announced drilling successfully extends both the surface pit and underground mineralization. Holes returned intercepts including 1.7 g/t over 21.9m and 3.74 g/t over 6.4m and serve to extend the south branch an additional 500m southwest. In total, 16 holes were drilled along the south branch and included other significant intercepts including 2.5 g/t Au over 24.4m, 1.85 g/t Au over 15.2m and 1.54 g/t Au over 18.3m.
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The deeper C-zone, located to the south-east of the South Branch also provided an attractive intercept with hole UC11-251 encountering two instances of mineralization at depth - 3.9g/t over 22.3m (620m downhole) and 3.63 g/t over 14.6m (756m downhole). A key focus for further drilling will continue to be the South branch and the deeper C zone.
?
Holes drilled to the north of the North Branch also extend the existing mineralization and the zone remains open to both the east and the west. Highlight holes from drilling in this region included 3.13 g/t over 5.8m and 3.19 g/t over 4.6m. See figures 1 & 2 for a map of drill hole locations.
Queenston Remains Well-Financed, Well-Positioned
?
The QMI drill program continues to target both shallow mineralization (amenable to pittable resources) as well as deeper mineralization with 4 rigs currently turning at Upper Canada. Being located in one of the most prestigious gold camps in Canada with $70 million of working capital, we'd reckon that positive news will continue to filter in as they advance, not only Upper Canada, but Upper Beaver, Bidgood and the exploration in the district.
Please see Disclosures and Disclaimers on the last two pages of this report.
Queenston Mining Inc. June 8, 2011
Page 2
Figure 1: Queenston Mining: Upper Canada Drill Results Hole #Section (ft)From (m)To (m)Interval (m)Au (g/t)Hole #Section (ft)From (m)To (m)Interval (m)Au (g/t)UC10-19965+00W428.5430.31.82.66UC11-249A1+00E51.2531.82.14443.2444.10.94.7672.283.811.61.04UC10-20065+00W253.3259.76.40.77120.4134.113.71.59348.4354.86.43.74including125.9126.80.914.56including350.23521.810.95215221.46.40.77UC10-20165+00W157178.921.91.69UC11-2501+00E7.3113.70.88including161.5162.40.96.3429.942.712.81.59UC11-22012+00W66.467.30.92.33106.4108.21.81.41UC11-2268+00E43.9451.13.01UC11-25155+00W623.9646.222.33.88UC11-2299+00E9696.90.95.45including626.7633.46.710.67244.1245.91.81.86756770.614.63.63255.1262.47.31.15UC11-25510+00W263.4265.21.84.2"New Zone" Discovery; Northland ZoneUC11-25610+00W59.2600.821.44UC11-23167+00W4.98.63.72.1205.1214.39.21.1136.6139.32.71.4UC11-25710+00W107.6112.24.61.17149.316313.70.92135139.64.61.08UC11-23267+00W55.256.10.98.06UC11-2589+70W32.338.15.83.13232.6247.214.61.31including32.333.20.916.51275.5279.23.70.7UC11-2608+00W244.4257.513.10.46UC11-23464+00W3.5107.3103.80.55303.9308.54.63.19UC11-23564+00W13.119.56.41.87UC11-2618+00W67.168.61.55.83121132110.7696102.46.40.64155.8210.754.90.38UC11-2625+00W60.768.37.60.67287.4308.4211.54UC11-27020+00W147.5162.114.60.55UC11-23667+00W33.86430.20.81203209.46.40.95UC11-2434+00E74.175.91.82.38UC11-27120+00W109.11100.91.64140.6155.815.21.85UC11-27220+00W39.348.49.10.8UC11-2444+00E31.748.817.10.87UC11-28225+00W115.5118.22.72.21121144.723.71.44134.11383.90.74249249.90.913.83UC11-28325+00W115.2126.110.90.56UC11-2454+00E72.389.617.30.74164.619227.40.72183.8184.70.93.36294.430914.60.62UC11-2464+00E24.433.99.51.33337.4341.13.78.0242.745.93.22.55UC11-28425+00W7583.28.20.9575.977.71.82.05UC11-2855+00W70.173.83.71.16UC11-2471+00E75.393.618.31.54214.92205.11.61134.716429.31.08UC11-2865+00W77.482.65.20.46188.1192.74.62.04UC11-2875+00W47.556.18.60.8UC11-248A1+00E51.256.85.61.07106.7131.124.42.5Average Width & Weighted Average Grade10.61.33including118.6125.676.57
Source: Company news release, June 7, 2011, Dundee Securities
Queenston Mining Inc. June 8, 2011
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Figure 2: Upper Canada Drill Plan - Gauthier Township, Kirkland Lake, Ontario
Source: Company press release, June 7, 2011
Queenston Mining Inc. June 8, 2011
Page 4
Queenston Mining Inc.QMI-TC$ 6.99RatingBUYC$ Target$10.00Shares O/S (MM)77.8RiskSpeculativeC$ Close$6.99Float (MM)77.8Fully Diluted Shares (MM)77.812-month return43%Basic Mkt. Capitalization ($MM)C$ 544All figures in C$, unless stated otherwiseYear-end December(000$)(000$)(000$)EVALUATION DATABALANCE SHEET2008A2009AQ4/10Year-end Dec.2008A2009A2010A2011EAssetsEPS-$ (0.03)$ (0.05)$ (0.11)$ Cash & ST Investments3,105 37,752 62,816 P/EN/AN/AN/AOther Current Assets13,970 709 19,926 CFPS before changes in WC(0.02)$ (0.03)$ (0.04)$ (0.06)$ Current Assets38,461 82,742 P/CFN/AN/AN/Amarket cap/reserve ozN/AMineral Properties38,480 49,731 96,997 enterprise value/reserve ozN/AOther non-current Assets577 577 577 market cap/resource oz206$ Total Assets39,057 88,769 180,316 enterprise value/resource oz182$ ASSUMPTIONS2008A2009A2010A2011ELiabilitiesGoldUS$/oz87297312261476Current Liabilities898 1,585 2,402 ExchangeUS$/C
.950.880.970.99Capital lease / LT Debt- - - Dundee Modelled Reserves and Other Mineralization (MM oz)Other non-current Liabilities389 420 9,255 RESERVES & RESOURCES (as of Dec 31, 2008)Total Liabilities1,286 2,005 11,657 TonnesGradeCont. Goldt g/toz Capital Stock74,348 94,533 176,913 Proven and Probable ReservesRetained Earnings(19,503) (7,769) (8,254) Upper Beaver- - Total Shareholder Equity54,845 86,764 168,659 Anoki-McBean- - Upper Canada- - EARNINGS SUMMARY2008A2009A2010A2011ETotal Reserves- - RevenueMeasured and Indicated Resources Gold- - - - KL East4,709 6.7 1,013 Other589 165 380 178 KL West33 42.5 45 Total Revenue589 165 380 178 Quebec- - - Gold costs- - - - Total Measured and Indicated Resources4,776 6.91,058 Other Costs(86) 3,549 2,613 4,000 Inferred ResourcesDD&A29 - 34 34 KL East5,585 5.1 924 Exploration- - - 2,000 KL West57 42.2 77 S, G&A1,720 1,772 3,150 3,000 Quebec3,166 5.2 526 EBIT(1,074) (5,156) (5,416) (8,856) Total Inferred Resources8,865 5.41,527 FX Gain- - - - TOTAL RESOURCE13,640 5.92,586 Interest- - - - Writedown of min. properties(193) (1) - - PRODUCTION ESTIMATES (oz)EBT(1,267) (5,157) (5,416) (8,856) Year-end Dec.2008A2009A2010A2011E less Tax(1,109) (2,900) (1,752) - Upper Beaver0000Net Income (reported)(158) (2,257) (3,664) (8,856) Anoki-McBean0000Average shares (MM)51.357.467.878.2Upper Canada0000Sub total0000STATEMENT OF CASH FLOWS(000$)TOTAL CASH COST ESTIMATES (US$/oz)2008A2009A2010A2011EYear-end Dec.2008A2009A2010A2011ENet Income (000's$)(158) (1,973) (3,664) (8,856) Upper BeavernanananaD, D&A29 - 34 34 Anoki-McBeannanananaFuture income taxes(1,109) (2,900) (1,752) - Upper CanadananananaWritedown of min. properties193 1 - - Wt. Ave.nanananaFX Gain- - - - NET ASSET VALUE0% NAVC$/share5% NAVC$/shareChange in working capital(211) (300) 171 - (beginning 2009)(C$MM)(C$MM)Other Operating(86) 3,027 2,543 4,000 Corporate DCF90913.405417.98Total Operating CF(1,342) (2,144) (2,668) (4,822) Cash and other-3-0.04-3-0.04Short term investments(13,283) 13,283 - - Exploration & unmodelled Resources2493.662493.66Mineral Properties(8,695) (11,037) (20,266) (65,975) Total1,15517.0378711.60Acquisitions- - 810 - Dundee DCF Target Multiple0.8xIncrease in Investments8,442 - - - Share Price Target10.00Other Investing258 146 (18,448) - Total Investing CF(13,278) 2,392 (37,904) (65,975) NAV & Target Sensitivity (C$/share) to Long-term Gold Price AssumptionEquity financing14,184 33,452 53,630 - Debt Issue- - - - NAV (C$/share)775925107512251475Debt Repayment- - - - 0% Discount9.1413.0817.0320.9727.55Other financing(72) 274 12,679 3,946 5% Discount6.128.8611.6014.3518.92Total Financing CF14,113 33,726 66,309 3,946 10% Discount4.466.478.4810.5013.86Foreign Exchange effect- - - - 15% Discount3.535.867.418.9710.79Change in cash(508) 33,973 25,737 (66,851) Cash position, end of year3,105 37,079 62,816 (4,036) Long Term Gold Price Assumption (US$/oz)0501001502002503003504002009201020112012201320142015201620172018000's oz050100150200250300350400US$/ozGold ProductionTotal Cash Cost0.01.53.04.52007A2008A2009A2010A2011EMM ozReservesM&I (excl reserves)Inferred02550752007A2008A2009A2010A2011Eoz /
000 sharesReservesM&I (excl reserves)Inferred
Source: Company reports, Thomson One, Dundee Securities
Queenston Mining Inc. June 8, 2011
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Disclosures & Disclaimers
This report is issued and approved for distribution in Canada by Dundee Securities Ltd., a member of the Canadian Investor Protection Fund, the Investment Industry Regulatory Organization of Canada and an investment fund manager registered with the securities commissions across Canada. Dundee Securities Ltd. is a wholly-owned subsidiary of Dundee Capital Markets Inc. Dundee Corporation is a significant shareholder of Dundee Capital Markets Inc.
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Queenston Mining Inc. June 8, 2011
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Dundee Securities Ltd. and its affiliates, in the aggregate, may beneficially own 1% or more of a class of equity securities issued by company(ies) discussed in this report.
A Research Analyst/Associate involved in the preparation of this report has visited certain material operations of the following issuer(s): Queenston Mining Inc. The analyst visited Queenston’s assets in the Gauthier Township in May 2009.
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Explanation of Recommendations and Risk Ratings
Valuation methodologies used in determining the 12-month target price(s) for the issuer(s) mentioned in this report are contained in current and/or prior research. Target Price N/A: a target price is not available if the analyst deems there are limited financial metrics upon which to base a reasonable valuation.
Queenston Mining Inc. June 8, 2011
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BUY: Total returns expected to be materially better than the overall market with higher return expectations needed for more risky securities.
NEUTRAL: Total returns expected to be in line with the overall market.
SELL: Total returns expected to be materially lower than the overall market.
TENDER: The analyst recommends tendering shares to a formal tender offer.
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*Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable liquidity and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the company's business and/or financial risk is high and is difficult to value. Venture: an early stage company where the business and/or financial risk is high, and there are limited financial metrics upon which to base a reasonable valuation.
SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares).
Ideas of Interest
Dundee Securities Ltd. from time to time publishes reports on securities for which it does not and may not choose to provide continuous research coverage. Such reports are published as Ideas of Interest.
Dundee Securities Equity Research Ratings 40%0%82%2%17%47%0%11%22%33%44%55%66%77%88%BuyNeutralSell% of companies covered by Dundee SecuritiesLtd. in each rating category% of companies within each rating category forwhich Dundee Securities Ltd. has providedinvestment banking services for a fee in thepast 12 months.
March 31, 2011
Source: Dundee Securities Ltd.