The Minnow That Swallowed The Whale - Firesteel Resources Inc (CVE:FTR, FRA:2FN)
Palisade Research November 15, 2017 Category: Research
In any industry, deal flow is key. Being the first to unearth new and exciting opportunities is the difference between making it big and making it nowhere at all.
Firesteel's management has demonstrated such an ability, sprinkled with a little luck.
Through the course of their dealings, Michael Hepworth and Basil Botha came across a group who were looking to sell a past-producing gold asset in Finland. The fully-permitted Laiva Gold mine was in receivership, boasting C$325 million of prior exploration and development spend. The sellers were motivated to divest, but only to proficient specialists in the gold sector.
As Michael and Basil executed their due diligence, they realized Laiva was a top-tier asset, and was a victim to a "perfect storm" of incompetent operators and a tumultuous bear market.
The mill is only two years old. It is high quality and has a liquidation value of C$100 million. The previous operator's poor mining practices resulted in a lack of metallurgy, poor grade control, and severe dilution. This all led to low mill capacity utilization and throughput. Operational costs spiked, and due to low gold prices and substantial debt, operations failed in a mere two years!
Through the advice of their mining and geological consultants, and a turning gold market, Laiva is poised to be a very profitable gold mine, and one with substantial exploration upside.
In June 2017, Firesteel signed a joint-venture with Nordic Mines AB (NOMI) to operate the Laiva Gold Mine. The underlying premise of the agreement is for Firesteel to provide the financing and resources required to restart the mine. This includes an investment of C$20 million in stages to acquire 60% of the JV, with the eventual option to acquire the remaining 40% for the fair market value in cash or shares.
Firesteel wasted no time in securing the big money, just a couple of months later, it announced the signing of a definitive agreement with Pandion Mine Finance LP for a financing of US$20.6 million via a prepaid forward gold purchase agreement.
Considering it will cost C$20 million to restart production, the agreement with Pandion is essential in moving forward. We believe the deal is accretive. While Pandion will be the beneficiary of 67,155 ounces at a discounted price, we believe it is insignificant to Laiva's true scale; it currently has 600,000 ounces in resources to draw upon.
Firesteel is undervalued in all metrics of our analysis, and we believe it will be the next mid-tier producer in Europe.
Laiva Mine - The Golden Ship Ready To Sail
Being a past-producer, all the infrastructure remains in place including a grid power (110 kV line), paved all-weather roads (within 5 km) and a port (within 20 km). The process plant is configured as a crushing, grinding, carbon-in leach facility with a tailings storage facility. The name-plate capacity is 250 metric tons per hour. 
As mentioned earlier, the project was doomed to fail, with the plant configured to sub-economic standards from the start. The underlying cause is attributed to the inaccurate resource model and subsequent mining practices. The previous model essentially 'smeared' mineralized zones into barren rock. Thus, the operator pursued large-scale bulk mining methods, leading to massive dilution and lowerthan expected head grade to the process plant.
Furthermore, due to the inaccurate model, the feed was not proportional, consisting of both hard granite and mineralized metavolcanics, while the mill design requires a stable blend. This accompanied by poor maintenance caused the mill to underperform, achieving a utilization rate of only 81.2%. When it was all said and done, operational costs were pegged at $1,760 per ounce gold.
Firesteel contracted John T. Boyd Company, Mining and Geological Consultants, to assess Laiva and provide recommendations. We know the John T. Boyd Company very well and their stamp of approval is a huge endorsement.
Moving forward, Firesteel will implement several significant changes. This will begin with the appointment of a General Manager, who will carry out improved mining practices recommended by JT Boyd and FTR's management team. The entire geological and resource model will be reworked, and this with better blasting controls will result in better pit grade control. There will be further mill improvements, and to ensure the feed is more uniform, a pre-crusher will be added. Firesteel highlights that every step in the recovery process can be optimized:
Exploration & The Upside 
Firesteel has earmarked some of the Pandion funds to explore the east side of the north pit to move some of the inferred and indicated resources to indicated and measured. There is also further exploration associated with the northeast trending structure defined by a gold-arsenic anomaly in bedrock sampling. The mineralization at the Laiva Gold Mine remains open at depth, further drilling will allow FTR to gain better understanding of the controls and down-dip potential.The Mussuneva-Kaukainen prospects are located 3 kilometers south of the Laiva Mine. It also shows gold in bedrock anomalies with arsenic-copper over an east-northeast strike of 1.3 kilometers and a width of 300 meters km.
Oltava is further to the south and shows significant high-grade intercepts in historic drilling. It shows a 1.0 kilometer by 800-meter bedrock anomaly, but requires a lot more reconnaissance before actual drilling can occur. To date, there has been no geophysical work done at the Laiva project.
According to our research, the Laiva mine commenced production in January 2012 and ceased operations in December 2013, but processed a low-grade stockpile until March 2014. During this time, the plant was utilized at a rate of 80% and produced 79,000 ounces of gold by processing 2.8 million tonnes of ore, at an average head grade of 0.9 g/t.
We used this data as a base, however, increased the utilization rate and the average head grade, as we believe JT Boyd and Firesteel will prevail in their optimization efforts. While the gold loan will take away some upside, there is still plenty of value left for shareholders. We calculate Firesteel's intrinsic value to be C$35.7 million, assuming 60% ownership of Laiva and that the gold loan closes.
In the short timeframe FTR has signed the JV, it has already engaged the needed consultants and is in the process of onboarding a Mine General Manager. The resource model has been refined, and mine planning and a PFS have already commenced. Firesteel believes it can get the mine fully operational in six to nine months, which is aggressive but very realistic.Laiva in itself is the real deal, and considering FTR's market cap is only C$11.4 million, the upside far outweighs the risks. This is an incredible deal with exciting catalysts on the horizon, and we have been accumulating and will continue to add to our position.
Palisade Global Investments Limited holds shares of Firesteel Resources. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.