49 North Resources Inc.
Corporate Update
August 2012
49 North Resources Commentary and Update – Summer Recap
As a follow up to our last conference call, we thought that we would send out a written commentary and update so that investors and interested parties could read this at their leisure. This commentary may contain forward looking statements and may refer specifically to news releases put out by the Company in the past which should be reviewed in conjunction with this commentary. Readers should read the disclaimer set out at the bottom of this letter.
The Macro View
European Debt Crisis, Greece, Spain, Italy, Cyprus, US Fiscal Cliff and China Economic Slowdown – these have dominated news feeds and investors minds over the past number of months. We would like to provide some macroeconomic thoughts and specific project commentary from 49 North’s point of view.
The atmosphere of crisis has the junior capital market (along with all of the broader world markets) continuing to struggle with low trade volumes and high volatility on top of the usual summertime lethargy with stocks treading water at 52 week lows. At 49 North, we remain cautiously optimistic looking forward to the fall and beyond while remaining vigilant in the very near term as we watch, wait and see how some of the current fiscal challenges move towards resolve. We have been actively managing 49 North to best insulate and benefit from the different potential outcomes of the current economic mess the world is in.
At 49 North, we are commonly asked whether we see some “screaming buys” out there at this time. The answer is “yes, but how loud can you scream, because it may be a better screaming buy in 2 weeks, 2 months or the end of the year”. In other words, while constantly keeping an eye out for opportunities, a general statement would be that “all bets are off until the US election is behind us and a more definitive action plan for the European economies is in place”. We feel that the best way to hedge your investments in this environment, to which 49 North is most heavily weighted toward, is to be in gold and oil.
Revisiting our statements from the May 2012 conference call, we feel that the main beneficiaries of the current economic turmoil, and the eventual economic recovery, will be natural resources; specifically gold and oil regardless of which way the world economy sorts itself out – whether economic stimulus sticks (inflation with real economic activity) and all commodities especially oil moves higher, or fails, whereby the Euro falls apart and a currency crisis ensues where gold really moves higher.
So while much of the news seems negative and stock prices look bleak globally, this has been a busy summer for 49 North. While low stock prices are keeping many junior resource companies out of the game; we have been working diligently behind the scenes. In particular, we are finding ways to move our oil & gas and gold assets forward specifically; Allstar Energy and the projects of CVG Mining, both private companies held by 49 North.
Oil & Gas Outlook
We have been intently focused on oil for the past number of months making great progress behind the scenes with what we believe to be a positive backdrop to the oil and gas sector worldwide and Canada in particular.
A couple of recent interesting observations which add a positive spin toward oil and oil pricing: CNOOC’s (China National Offshore Oil Corporation) recent bid for Nexen might be looked at as a longer-term tell from one of the world’s biggest economies investing for the future in very large heavy oil and big natural gas assets. Indeed, another tell may be the fact that China, while finally capitulating and allowing the Yuan to fall relative to other currencies, appears to now be bent toward allowing it to strengthen. It is a real possibility that, like their bid for Nexen, their quest for a stronger currency would be to allow them to buy further assets and commodities for their future now.
Additionally, the increasingly high marginal cost of oil in North America and around the world (non-OPEC) can arguably underpin the longer-term price of oil. The marginal cost of oil is currently somewhere between $90 - $100/barrel. Prices may fall below those costs, but not likely for an extended period of time as without price incentive to produce that last barrel the consumer’s demand will go unfulfilled until they are willing to pay up.
The Riverside Project – Allstar Energy’s Latest Heavy Oil
We are extremely pleased and excited about the future prospects of the Riverside project. Since our last update, without reiterating entire news releases (see news releases June 20 and May 29, 2012) Allstar has now successfully completed 2 heavy oil wells at Riverside with a combined production in excess of 160 barrels of oil per day. Also, subsequent to the last update, Allstar has initiated a 3D seismic program at Riverside from which a development well program will be planned for the Riverside land (see news release July 25th 2012). In conjunction with the seismic program, Westcore Energy has entered into a farm-in agreement whereby they will earn a 60% interest in certain wells at Riverside and an ongoing right to fund 100% of the costs of additional wells to earn a 60% interest. The take away from this agreement is that 49 North is advancing its most economically feasible project without the dilution of issuing stock in poor market conditions.
The Riverside project encompasses a large land package of approximately 31,360 acres near Leader, Saskatchewan where the neighboring Mantario field has produced some 47,000,000 barrels of oil from a similar zone in the same formation over the past 20 years.
A key factor to bear in mind when it comes to the economics of the Riverside (and Red Pheasant) heavy oil plays, is that this is conventional drilling, high netback, low capital cost oil – not unlike Alberta of several decades ago. While the rest of the world is now focused on much higher cost, newer technology plays such as the Bakken in N. Dakota and Saskatchewan or Eagle Ford in Texas, the Riverside wells are projected to cost in the neighborhood of CDN$600,000 to drill, service and bring into production (Some Bakken well costs are now in excess of USD$10mm). Both the Riverside and the Red Pheasant heavy oil plays display the typical shallow decline of heavy oil production versus the steep decline of LTO (light tight oil) plays.
Red Pheasant – Allstar Energy’s Other Heavy Oil Play
With 6 wells currently in production and a 3D seismic program complete, the company is currently working on permits to test the lower Manville channel and potential enhanced waterflood production from the currently producing upper Sparky zone. Our near term plan, once the relevant permits are in place, is to drill a test well into the lower Manville. Drilling will be completed by the end of September 2012.
Gold Outlook
We, amongst others, agree that the current state of fiscal affairs in Europe, US and other countries is a good environment for the price of gold, whether the world economies inflate their way out of trouble, or a recessionary scenario takes hold and economies and currencies collapse. Either of these scenarios should play in favor of gold. The price of physical gold has held up quite well, yet this is not at all reflected in gold stock prices, particularly in the dismal junior markets. In this environment, one of the best ways to derive or crystallize some real value is to produce high-grade, low cost gold. That is exactly what we have with our investment in CVG Mining and the Wingdam project, as the company continues to make significant progress since our last update.
Newsk – CVG Mining
In our last conference call (see May 2012 conference calls on website) we mentioned that CVG Mining had successfully completed a bulk sample program and had commissioned MineTech International Ltd and Thyssen Mining to complete a mining and ground stability plan for the Wingdam alluvial gold project in the central Cariboo region of British Columbia.
49 North has since been notified that the plan is near completion, subject to management and peer review. The company hopes to validate the economic feasibility of putting the project into production. If the studies substantiate the economics to produce, CVG will move forward with the permitting and production plans at Wingdam, the details of which will be released as soon as they are completed. We are pleased with results that have confirmed historical drilling on the property. The project is permitted for water and further applications will be made to government with the desire to have the project fully permitted by the end of this year, predicated on an economically feasible mining plan from MineTech. Financing options for the project have been identified and are currently under due diligence and consideration. Start up costs are currently anticipated to be in the range of $5 to $10 million as most of the capital equipment is in place and the initial development drifting (lateral mining to reach the ore zone) was done with the bulk sampling. The main take away from this is that this deposit of alluvial gold can be produced without the extensive crushing, milling, chemical leaching, tailings and processing costs of conventional gold production. Rather than having to dissolve “hidden” gold out of solid rock, it is simply a matter of separating gold particles out of gravels and recompressed sediment from the pay zone through water assisted crushing, similar to a simple sluicing operation. Given the information we have to date regarding the Wingdam deposit and the preliminary work we have seen on the mining plan, we are confident that the project can be robustly economic at current gold prices.
49 North continues to make strides on a variety of projects and we look forward to seeing some of our recent work come to fruition in the near term. We will announce any developments as they happen and anticipate having a conference call update in late September