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This is an article about a so-called project generator exploration company called Reservoir Minerals (RVRLF.OB).
The project generator business model involves searching for metals and minerals exploration opportunities, develop them to an early stage and then find partners to earn into the project by paying for further exploration activities. In this manner, the project generator retains an interest in an exploration property without having to contribute to exploration and development cost.
Reservoir Minerals has managed to hit a jack pot. The chart below bears testimony to this statement.
RMC data by YCharts
The latest move up in the chart above was triggered by drill results from two holes announced on July 22. Each hole showed more than a kilometer (yes, kilometer as in 1000m!) of economical grade copper and gold. And as if this was not enough, these two and many other holes were drilled and paid for by one of the largest base and precious metals miners Freeport McMoRan (FCX).
Freeport McMoRan has agreed to fully fund exploration and development of the Timok project in Serbia to completion of a bankable feasibility study for an interest of 75% in the project. Sure, this leaves only 25% for Reservoir Minerals once the BFS is completed; but this is a 25% interest in potentially one of the largest copper-gold deposits known to man. And it is a free ride all the way to the BFS.
This project is a blind discovery near the mining town of Bor in Eastern Serbia near the border to Romania. This region is part of the highly prospective Tethyan belt that extends from Romania through Serbia and Macedonia into the North-Eastern corner of Greece and onwards into Turkey.
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The town of Bor has a history of mining copper and gold dating back to the times of the Roman empire. There is an operating open pit mine and various underground workings at Bor with recorded production of 6M tonnes of copper and almost 10M ounces of gold during the past 110 years. This mine still has more than this historic production again in reserves.
A new smelter is currently being installed with completion anticipated towards the end of this year. Centuries of mining and smelting has left its mark on the town and its surrounds and modern technology will hopefully go some way in alleviating some of the environmental problems of the area.
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(picture taken fromhere)
Reservoir Minerals holds 7 licenses in the area neighboring existing mines and covering 535 square kilometers. The joint venture with Freeport McMoRan concerns 3 of those licenses, collectively called the Timok project. Freeport McMoRan is a very large mining company and as such only interested in developing large and world-class deposits which actually move their needle.
Reservoir Minerals had entered into an agreement with Freeport McMoRan in March 2010 allowing Freeport to earn a 55% interest in the Timok project by spending $3M until March 2014. It took a little more than two years until the discovery hole was drilled and the JV gathered steam. Freeport almost immediately gave notice that it intended to exercise the option to sole-fund and manage exploration of the Timok project until delivery of a BFS in exchange for an eventual 75% interest in the project.
At the time Simon Ingram, President and CEO of Reservoir Minerals commented:
"The Company believes this drill hole represents the possible discovery of a potentially large blind copper - gold epithermal and porphyry mineralized system, and may be consistent with historical grades reported from other high sulphidation systems in this world-class copper mining district."
Additional drill results announced since the publication of the discovery hole seem to confirm this comment. The most recently announced results mentioned at the start of this article topped all previous results and ignited the share price which has risen to an all-time high of $4.37 and counting at the time of writing.
So far the drill results indicate very consistent mineralization presumably amenable to underground block caving. If this project is ever turned into a mine, it will certainly benefit from the proximity to all necessary infrastructure such as railway and road connections, sufficient water and inexpensive power as well as ample skilled work force. In 2012 a new mining code was introduced which was widely welcomed by the international mining community in Serbia which also includes mining heavy weight Rio Tinto (RIO).
Serbia has received a lot of bad press but the tide has been turning for the better in this country. Serbia finally became an official candidate to join the European Union just a few weeks ago in June 2013. The country is now a stable democracy and the government supports mining with a view to increase the GDP contribution from mining to 5% by 2020 from currently 2%. The corporate tax rate is a modest 15% which comes on top of a 5% NSR royalty on copper and gold.
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(Winter drilling in Serbia. Picture taken fromcompany website)
While the Freeport JV is without doubt the main attraction with Reservoir Minerals, a quick look on the other ongoing projects is certainly warranted.
The Deli Jovan project is situated in the same general region to the East of the Timok project. London-listed Orogen Gold (LSE:ORE) may earn up to 75% interest in this project by spending $3.5M until June 2014. There are two historic gold mines on the property which Orogen is currently refurbishing. Orogen is working towards re-opening these mines and starting small-scale production. Drill results announced earlier this year showed narrow mineralization at very high grades and identified previously unknown mineralized structures.
The company also holds 100% of two more licenses close to the Timok project for which it is currently seeking JV partners.
Furthermore the company has been busy accumulating further exploration properties throughout Serbia and is in the process of seeking similar opportunities in Romania and Macedonia.
Reservoir Minerals is also involved in grassroots exploration in the African countries of Cameroon and Gabon.
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At the time of writing the 41.7M outstanding shares of the company are trading at just over $4 resulting in a market capitalization of $170M. Insiders own 8.5% of the company plus 5% of the fully diluted stock in options. The stock is listed on the Venture Exchange in Toronto (TSX-V:RMC) and trades on the pink sheets in the USA. About 15,000 shares were traded per day on average during the past three months providing adequate liquidity for retail purposes. We note that the company has been remarkably unaffected by the recent down-turn in the commodity space.
At the end of June the company had no debt and $18M (Canadian) in cash. The budget for the 2013 work program is $5M already including administrative costs. For the time being the company is cashed up and fully funded to continue its activities for the foreseeable future.
Reservoir Minerals remains a highly speculative investment proposition, even with the JV in place and the balance sheet in good order.
We believe that currently the share price of the company is appreciating in a bubble-like fashion following the latest drill results from the Timok project. There is the possibility for a short-time trade for risk-seeking traders. However, it should be pointed out that steep trajectories like this often come crashing back down very quickly and without much warning once the initial exuberance abates.
For investors with a longer view the crunch time for Reservoir Minerals will come with the finalization of the BFS for the Timok project. A negative outcome, or an outcome that does not maintain the interest of Freeport McMoRan will turn Reservoir Minerals back into the penny-stock it was prior to making the discovery. A positive outcome will necessitate decisions on how to participate in mining the deposit, if at all.
Developing a mine of the emerging magnitude will require immense capital, quite probably a multiple of the company's market capitalization even when considering only the 25% stake Reservoir will own by that time. Further dilution of ownership in the project might have to occur in order to raise money for mine development. Having a seasoned mine operator as a partner will certainly assist in negotiating financing with banks.
Alternatively, the company could decide to sell its stake to Freeport McMoRan altogether once the NPV of the project is known, or possibly retain just a small royalty. The price that could be expected for such a deal would allow for a sizeable one-time dividend for shareholders plus working capital for a long period of time to come.