Research Upate
July 7, 2011
Vikas Ranjan, MBA
(647) 352-2666
vikas@ubikacorp.com
Excellent drill results continue to validate potential: Drill results from
Hy Lake Gold’s 100%-owned Mount Jamie and Red Summit properties
continue to suggest the presence of high-grade gold bearing multiple vein
systems. The deposits appear to be open at depth and along the strike.
Extensive drilling still to come for 2011: The company has commenced
a 5,000-metre drill program at the Rowan Lake Mine Property, a JV with
Goldcorp (see next bullet). Hy Lake had a very successful 2010 with
respect to drilling at the Goldcorp joint venture Rowan property. The
current drilling program will aim to expand high-grade zones at the newly
discovered Rowan-NT zone.
Joint Venture with Goldcorp announced: Hy Lake completed the
requisite spending on the Rowan property and elected to exercise its right
to become the operator with 60% ownership in the Rowan property.
Goldcorp will be a JV partner with a 40% stake. Very few junior gold
companies can claim to have an earned option to become an operator on
a highly prospective Red Lake property, with Goldcorp being the joint
venture partner. We think Hy Lake’s relationship with Goldcorp will be very
conducive for future exploration and development.
Undervalued compared with peers: We believe that Hy Lake is currently
commanding $35/oz to $45/oz (see valuation discussion later in this
report) for its current resource deposit. Comparable figures for more
established junior gold exploration companies in a high profile gold district
such as Red Lake range from $100/oz to $200/oz. Hy Lake has strong
exploration potential and its land package is one of the best in the Red
Lake district. We see this valuation gap closing in the near future as this
company gets better market profile and exposure.
M&A Potential? We believe that bigger gold miners as well as upcoming
gold producers will look to acquire high value resource deposits and will
prefer acquisitions in their own backyards. Hy Lake can attract
considerable attention in coming years as it advances its exploration
program and builds resources deposit.
Several short-term catalysts: Investors can expect significant news flow
during 2011 as the company carries out a rigorous drilling program. The
company has identified several high-grade gold bearing zones at its
properties, which could provide several high value targets in the upper
end, leading to strong drill results in the coming months.
We continue to find Hy Lake undervalued and consider this a top prospect in the
Red Lake gold district. Our model price of
.81 represents a gain of 200% from
the closing price of
.27 on July 6, 2011(please refer to our initiation report for
more details on our model price on Hy Lake Gold Inc.)
Hy Lake Gold Inc. (CNSX: HYL, Frankfurt: HYK)
Symbol
(CNSX: HYL)
Ubika Model Price
(UMP)
.81
Ubika Rating
Undervalued
Risk
High
Price (July 6, 2011)
.27
Gap to UMP
200%
52 Week Range
.05 -
.60
Share O/S
41.64 Million Shares
Market Capitalization
$11.2 million
Hy Lake Continues To Impress With Recent Drill Results
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 2
Executive Summary
Hy Lake Gold Inc. is a junior exploration company listed on the CNSX or Canadian National
Stock Exchange (HYL) and Frankfurt (HYK), with several interests in the Red Lake Mining
District, including three past producing properties. Its properties now include a 12-km long
continuous strike length along the Pipestone Bay - St Paul Bay deformation zone.
Its strategy is to leverage the ability of its talented management and exploration teams to
recognize underexplored and overlooked geological opportunities that are adjacent to previous
big finds.
Ubika Research initiated coverage on the company in May 2008 and has provided regular
updates since then, the latest on March 3, 2011. All research reports and the CEO video
interviews are available online, in this case at
In our last update on March 3, 2011, we summarized the significant progress made by the
company during 2010 with exploration and on the corporate front. We noted that Hy Lake Gold’s
stock had a great run leading to the first quarter of 2011, as investors increasingly started to
notice its strong investment potential given its relative undervaluation compared with its peers in
the Red Lake gold district.
In this update, we are pleased to report that the company has made considerable progress with
its exploration program as it continued an aggressive drilling program at its various properties,
including Mount Jamie and Red Summit. The company also announced plans to resume an
active drilling program at the Rowan property.
The most important development related to the drilling program is that drill results so far seem to
provide further credence to Hy Lake Gold’s exploration concept that all known mineralized
zones on its properties may belong to a single family of nearly vertical trending, gold-bearing
vein system. This exploration concept was described in the structural study released by the
company in 2010. If proven correct, this could mean that Hy Lake Gold has a huge, 12 km long
exploration horizon along these vein systems, which may be connected and contiguous.
We believe that if this concept is proven correct, the company could have tremendous
exploration potential and host a multi-million-ounce gold resource deposit. Mines in the Red
Lake district run deep and Hy Lake has not yet explored its properties at depth. We believe that
the exploration, which so far has reached a depth of only 300 metres, is still considerably
shallow and the company has excellent potential to explore for high value targets at depth.
The company has also achieved a major milestone by announcing that its JV option with
Goldcorp on the Rowan Mine property is finally official. As we had anticipated in our most recent
report, Goldcorp decided not to exercise the option of increasing its stake in Rowan and has
agreed to become a 40% JV partner, with Hy Lake owning 60% of the property as the JV
operator.
During 2011, the company has been engaged in a very active exploration program at its various
Red Lake properties. The company has announced strong drill results so far and we anticipate
more news flow during the remainder of this year. The company is sufficiently funded for the
initial phase of the drilling program and we believe that it will raise more capital during the
course of the year to fund the programs throughout 2011 and in 2012.
We also believe that the company will continue to add more strategic land positions to its
already extensive footprint in the Red Lake District. Last year, it added two additional claims
near its Mount Jamie property, optioned from Rubicon, and remains on the lookout for more
acquisitions of land packages surrounding its core properties
Based on our discussions with management, we continue to believe that the company continues
to seek a listing on a bigger exchange, which will give the company a much-needed higher
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 3
profile in the capital market. We anticipate a big board listing is possible some time during this
year.
We remain very positive about the prospects for Hy Lake Gold. The company has one of the
best property packages in the Red Lake District. The district itself is considered one of the most
prolific gold belts in the world, with tremendous exploration potential. The company is still
considerably undervalued compared with its peers in the region, which will likely change as it is
noticed by more and more market participants.
2011 Exploration and Development Update
The most important development related to the drilling program so far this year is that drill
results seem to provide further credence to Hy Lake Gold’s exploration concept that all known
mineralized zones on its properties may belong to a single family of nearly vertical, east-west
trending, gold-bearing vein system. This exploration concept was described in the structural
study released by the company in 2010 and if proven correct could imply that Hy Lake Gold has
a huge, 12 km long exploration horizon along these vein systems, which seem similar in
structure and may be connected and contiguous. This could imply a huge exploration potential
and a real opportunity to find a multi-million ounce deposit at Hy Lake’s properties.
Exploration update on the Mount Jamie Mine Property
Hy Lake’s 100%-owned Mount Jamie property consists of nine claims and totals 140 hectares.
On January 25, 2011, the company commenced a winter drilling program at this property.
Hy Lake Gold is following an exploration program during 2011 based on the understanding and
the analysis of the compiled data from earlier exploration programs. The main objective of the
2011 exploration program is to further define the continuity of high-grade intercepts and expand
along strike and at depth, the known zones of mineralization on the Mount Jamie property. The
planned drilling is also aimed at testing a new target, which could help establish continuity
between the Mount Jamie Mine property and the Rowan Lake Mine property.
The winter drilling program consisting of 31 drill holes totalling 3,489 metres at the Mount Jamie
property resulted in several holes that returned gold assays ranging from 2.2 gpt (grams/tonne)
to 34 gpt over narrow widths ranging from 0.5 to 2 metres. The drilling led to results that
confirmed the existence and strong spatial continuity of three mineralized trends in an East-
South-East direction. These results also indicate the presence of multiple mineralized vein
systems and the continued expansion of high-grade zones at this property.
Drilling in the central part of the North Vein Trend returned the highest gold assay of 34.2 gpt
over 1 metre. This zone is in close proximity to the main shaft of the past producing Mount
Jamie Mine and presents an immediate and exciting opportunity for the company to drill the
downward extension of the mineralization in this area.
Exploration Update on the Red Summit Mine Property
A drill program was undertaken at this project in 2008 and resulted in some very good results.
The drilling program during 2011 on the Red Summit property is a follow-up drill program to that
undertaken during 2008. The company recently announced results from its spring 2011 program
at the Red Summit Mine property.
The nine-hole, 2,153 metres program resulted in several high value drill results. The main
highlight of the drill program was the confirmation that the gold mineralization extends at least
150 metres south-east, beyond the current mine workings, and remains open at depth.
Another key finding of the recently concluded drill program is the confirmation that the Red
Summit property structural environment appears very similar to the Mount Jamie Mine property,
where the company has recently discovered several new trends of significant gold
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 4
mineralization. A logical interpretation if this fact is the potential for similar multiple trends on the
Red Summit property as well as the fact that all different zones on the Hy Lake properties might
just belong to a single family of gold bearing vein systems.
Initially this year, the company was planning 2,000-2,500 metres of drilling at this project. Based
on the encouraging results and better understanding of the structure, we believe that it may
decide to expand the program.
Exploration update on the Rowan Lake Mine Property
At the Rowan Lake property, the company has a well-defined plan for the exploration program
with high priority targets established for this year. The company announced on June 16, 2011,
that it had resumed drilling at this property. As we had anticipated in our last update, the 5,000-
metre drilling program will primarily focus on expanding the high grade Rowan-NT structural
corridor along the strike both to the south-west and to the north-east.
The Rowan-NT zone is a new discovery on the Rowan Lake Mine property and presents a
significant opportunity. The previous exploration program showed that the east extension of the
Rowan Main Zones was at the very north side of the Rowan property. The company acquired
additional claims from Rubicon Minerals (TSX: RMX), which are located at the north side of the
Rowan property. With the acquisition of these new claims, the company now has access to the
north-east extension of the Main Zones, including a very promising Breccia zone to the north of
the Main Zones, which it can explore.
Corporate Development: Joint Venture with Goldcorp Signed
On May 6, 2011, Hy Lake Gold announced that it had entered a joint venture agreement with
Goldcorp to explore the West Red Lake Property-the Rowan Property. This JV is the result of
Hy Lake completing the earn-in conditions of the Rowan Property Option and Joint Venture
Agreement dated December 5, 2007, between Hy Lake Gold and Red Lake Gold Mines
(RLGM), a partnership of Goldcorp Inc. (TSX: G:; NYSE: GG) and Goldcorp Canada Ltd.
As we mention in our last update, the Rowan property is under option from Goldcorp and Hy
Lake, having spent the required $2.5 million to earn a 60% interest, has now officially become
the operator of this property, with Goldcorp becoming a 40% JV partner. Goldcorp has been
issued 1,000,000 shares of Hy Lake.
We find this development very encouraging. The property hosts the past producing Rowan Lake
Gold Mine, adjoins the past producing Mount Jamie Mine (100%-owned by Hy Lake Gold) to the
east and surrounds the past producing Red Summit Mine (100%-owned by Hy Lake Gold).
There are very few junior gold exploration companies that can claim to have a fully earned-in
joint venture with Goldcorp Inc., world’s second largest gold producer and the most active
producer in the Red Lake district. This is a key strategic advantage for Hy Lake Gold as
Goldcorp will now fund 40% of all exploration on the Rowan Lake Mine property and will work
closely with the company to advance this project.
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 5
Valuation Discussion
Red Lake district is one of the most prolific gold belts in Canada and hence home to many
established as well as upcoming junior gold exploration companies. Some notable examples
include Premier Gold Mines Ltd (TSX: PG), Rubicon Minerals Corp. (TSX: RMX) and Claude
Resources Inc (TSX: CRJ). A neighbour of Hy Lake was Gold Eagle Mines Ltd., which Goldcorp
acquired for Cdn$1.47 billion in 2008. When Goldcorp acquired this mine, it paid close to $400
an ounce for the known resource controlled by Gold Eagle Mines.
Big gold miners continue to pay a high price to acquire known deposits. There is clearly a hefty
premium for high grade known resource deposit as was evident in the recent acquisition of
Almaden Resources by Goldcorp, for which it paid close to $330/oz for the known resource.
Junior gold exploration companies in the well-known gold district such as Red Lake command a
market value ranging from $100/oz to $150/oz, depending on the exploration stage and future
potential. For a company such as Hy Lake Gold, with a large land package in a highly
prospective area, we believe that a conservative estimate would be at least $100/oz.
Based on the historical drilling at its various properties, we believe that Hy Lake currently has a
gold resource deposit in the range of 300,000 oz to 400,000 oz (of which up to 100,000 oz could
be in the Measured & Indicated categories) at its various properties that can be verified and
confirmed using well accepted methodology as the company carries through its exploration
program.
Even at a conservative $100/oz, just the current resource estimate should be valued at up to
$40 million, which should translate into
.96 per share value for Hy Lake shares based on 41.6
million shares currently outstanding,. Clearly, based on the most recent close of
.27 on July 6,
2011, Hy Lake Gold shares are significantly undervalued compared with junior gold exploration
companies of similar size and at a similar exploration stage.
Hy Lake shares seem more undervalued when compared with the value awarded to more
established players in the Red Lake district. A peer group analysis table below shows the
market cap per ounce awarded to more established players in the Red Lake district.
Peer Comparison Analysis
Rubicon Minerals
(TSX: RMX)
Premier Gold
Mines Ltd.
(TSX: PG)
Claude
Resources
Inc. (TSX:
CRJ)
Hy Lake Gold
(CNSX:HYL)
Financial Date (Last reported)
Share Price (July 6, 2011) 3.40 5.76 1.94 0.27
Share O/S(mil.) 214.34 104.36 163.88 41.64
Market Cap(mil.) 728.76 601.11 317.93 11.24
NI 43-101 Compliant Resources(mil.)
Gold and Gold Equiv. Au(Oz)
Measured & Indicated 0.00 1.22 0.93 0.00
Inferred 3.05 1.09 0.30 0.30
Total 3.05 2.30 1.23 0.30
Mkt Cap/Au(Oz) 238.94 261.24 259.53 37.48
Avg Mkt Cap/Au(Oz) 199.30
HYL Stock price (Peer Group Est.) 1.44
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 6
Source: Company Reports, Ubika Research
As shown in the table above, based on the resources estimates, the average market cap per
ounce of announced resource is approximately $200/oz for more established companies in the
Red Lake district.
For the sake of simplicity and to be conservative in our calculation, we take the low end
estimate of 300,000 oz as the gold resource deposit (at various properties that can be verified
and confirmed using well accepted methodology) that Hy Lake currently has and assume that all
of that is in the inferred category.
Based on the peer group analysis and 41.64 million shares currently outstanding, we arrive at a
per share value of $1.44 for Hy Lake shares. Clearly, based on the most recent close of
.27
on July 6, 2011, Hy Lake shares are considerably undervalued compared to its peers in the
same region.
We see this valuation gap closing as the company moves to a bigger and more liquid stock
exchange and the market comes to realize the potential in the company.
M&A Potential
The largest gold producers are seeking to replace their depleting reserves. The fundamentals in
the gold industry are aligned to spur M&A activities in general. There has been strong increase
in demand for investment and financing purposes but not much has been discovered in the form
of new deposits in recent years. With gold prices at an all time high, the industry will likely see a
flurry of M&A activities as intermediate and bigger miners try to acquire new deposits through
the acquisition of successful junior gold explorers.
Some recent acquisitions and price paid per ounce by big miners for high value deposits are
listed in the table below:
Company/Project Acquirer Year Price/Oz
Gold Eagle
Mines* Goldcorp Inc 2008 $380
Andean Goldcorp Inc 2010 $330
AuEx Venture Fronteer Gold 2010 ~ $400
Fronteer Gold Newmont Gold 2011 ~ $325
Redback Mining Kinross Gold 2010 $675
* Based on the known resource deposit at the time of the acquisition.
The Red Lake Mining District is the backyard of Goldcorp, which snapped up Gold Eagle Mines
for Cdn$1.47 billion in August 2008. With gold prices climbing ever higher, more senior
producers are looking to expand resources by acquiring promising juniors. Hy Lake Gold has
assembled a 12-km long package of high potential, contiguous mining properties in the west
Red Lake area, which bodes very well for a possible future acquisition of the company by a
large producer such as Goldcorp.
Ubika Research continues to believe that Goldcorp will favour properties that will add to its
resource base and those that are in the well-known backyard of its largest mine.
Apart from Goldcorp, there are several other upcoming junior gold explorers and near-term
producers such as Rubicon Mineral and Premier Gold Mines, which are looking to grow quickly
and would add resources through acquisitions if right opportunities come along. A case in point
is the recent acquisition of Goldstone Resources (TSX: GRC) for $98 million by Premier Gold.
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 7
We believe that as Hy Lake continues with its planned exploration program during 2011, and
beyond, and confirms a contiguous stretch of strike length on the Pipestone-Bay-St. Paul Bay
deformation zone, it may attract considerable attention from potential suitors, including
Goldcorp, which are looking to add a resource base for expansion.
Short-Term Catalysts
Extensive drilling to continue
2011 is proving to be a very active year for Hy Lake in terms of an exploration program. The
company just completed two exploration programs at the Mount Jamie Mine and the Red
Summit Mine properties. It just commenced a 5,000-metre drill program at the Rowan Lake
Mine property to test high-grade mineralization zones. We believe that these drill programs are
providing more knowledge to the company to define better targets. This should result in a
steady flow of exploration news and could generate several short-term catalysts.
New resource estimates
The company has completed a revision of its resource estimates at its two main properties,
Mount Jamie and Rowan Lake. We believe that Hy Lake is working on updating the resource
estimates for these properties. We believe that it is working on a technical report that will involve
resource calculation for the Rowan property and will compliment an updated technical report on
the Mount Jamie property for the inclusion in an NI 43-101 compliant report. We also believe
that as the drilling program gets underway at these properties during 2011 and beyond, it will
have more opportunities to extend and expand the resource estimates and we believe that it will
be one of the core objectives of the company in next 12 to 18 months.
Move to a bigger stock exchange
We continue to believe that a key objective for Hy Lake Gold is to seek a listing on one of the
larger stock exchanges this year. We continue to believe that this is still an achievable goal for
the company. Our most recent discussion with the company indicates that it could seek a listing
directly on the Toronto Stock Exchange (TSX) instead of on the TSX Venture Exchange, as was
announced earlier. The change in plans could be related to a plan to open the market in shares
of Hy Lake to a broader investor audience, especially institutional investors. A move to the TSX
will likely improve liquidity in the stock and will help the company expose its investment potential
to a wider investor base.
Ubika Research: 36 Lombard St, Ste 700, Toronto, Ontario, Canada M5C 2X3 8
Analysis and Conclusion
We continue to believe that Hy Lake Gold is one of the most promising junior gold exploration
companies active in the Red Lake mining district. It is well positioned to benefit from its close
relationship with Goldcorp. Our research indicates that the company has tremendous potential
to develop gold exploration assets to a significant size with the drilling programs planned for
2011 and beyond.
Hy Lake has consistently obtained good drilling results and has shown strong exploration
promise. There is strong evidence of gold mineralization associated with the favourable Red
Lake geology, both along strike and below the historic Mount Jamie Mine, Rowan Lake Mine
and Red Summit Mine workings along the Pipestone Bay - St. Paul Bay Deformation Zone.
Another factor that gives Hy Lake an advantage is its close relationship with Goldcorp. Ubika
Research continues to believe that Goldcorp will favour properties that will add to its resource
base and those that are in the well-known backyards of its largest mine. Goldcorp has a joint
venture interest with Hy Lake Gold in the Rowan Lake Mine property. If Hy Lake can
successfully expand its resource base, a possible acquisition interest from Goldcorp will be very
real.
The most recent drill results seem to indicate that all known mineralized zones on Hy Lake
Gold’s properties may belong to a single family of nearly vertical, east-west trending, goldbearing
vein systems. This could imply that Hy Lake Gold potentially has a huge 12 km long
exploration horizon along these vein systems, which seem similar in structure and may be
connected and contiguous. This could imply a huge exploration potential and a real opportunity
to find a multi-million ounce deposit at Hy Lake’s West Red Lake properties.
We believe that the company now has the necessary platform to launch itself as a company of
choice for investors seeking the next best investment option in the Red Lake Gold District.
We continue to rate Hy Lake Gold as Undervalued (please see an explanation of our
rating and target system at the end of this update) and have calculated the Ubika Model
Price (UMP) to be Cdn
.81 per share. (For more about our model price on Hy Lake Gold
Inc. please refer to our initiation report issued on May 20, 2008. The report is available at
https://www.smallcappower.com/microsite/Hy_Lake_Gold_Inc_research_reports