Noront Resources

Re: Expresses - Thursday, July 16, 2009
Title: Express 2009-02: McFaulds Lake corpse lurches from the grave: is it a zombie or a lazurus?
Publisher: Kaiser Bottom-Fish Online
Author: Copyright 2009 John A Kaiser

Express 2009-02

July 16, 2009

McFaulds Lake corpse lurches from the grave: is it a zombie or a lazurus?

Introduction: During the last two days volume in Noront Resources Ltd (NOT-V: $1.42) has exploded along with the price, trading 15,267,850 shares on Wednesday July 15 and 20,007,874 shares on Thursday July 16 to close up $0.79 or 125%. On July 15 Noront put out a news release that there were "no corporate developments or undisclosed material changes" and that all outstanding assays related to the Eagle One project in the McFaulds Lake region of northern Ontario were still pending. The only significant news in the public domain that I can discern is a June 29 announcement that hole 09-49, drilled as a platform hole for down-hole geophysical surveys intended to identify deep conductors interpreted as sulphide bodies not visible through geophysical surveys applied at surface, had intersected two deep and long intervals of mineralization that included the spectrum of disseminated to semi-massive to massive sulphides. Holes 46-48 either snipped nickel-copper sulphides or missed the Eagle One deposit altogether at depths above 375 metres, which has been the story of Eagle One's delineation since its surprise discovery in late August 2007. Although Noront described all the shallow intersections as "nickel-copper" sulphides, which presumably is based on the visual identification of pentlandite (nickel) and chalcopyrite (copper) crystals in the core, it said no such thing with regard to the sulphide intervals intersected between 269.54 to 510.69 m (241..15 m) and from 749.7 to 945.67 m (195.97 m). If we were to treat the current Noront management as consistent and honest in their disclosure policies, this omission should be interpreted as a clue that the sulphide mineralization intersected beneath the Eagle One deposit does not contain anywhere near the copper or nickel mineralization evident in the Eagle One sulphides or those alluded to in holes 46-48. Offsetting such assumptions, however, is the fact that on the next day Noront management granted itself 3,865,000 options at $0.62. Noront also neglected to break down the sulphide categories into lengths, which leaves everybody but insiders in the dark about how much is massive and thus possibly high grade like Eagle One if the sulphides are indeed "nickel-copper", and how much is likely lower grade. In keeping with the practices of the old management bounced out last October, the new management has not graced the public with up to date drill plans, which may simply be because this bunch is as technologically challenged as the first bunch. Given that the current management consists largely of former Aurelian executives who bent over backwards to provide full information to the market about the Frutta del Norte gold discovery in Ecuador, it will certainly be a surprise if the deep intervals intersected by hole 09-49 do indeed contain ample evidence of nickel-copper sulphides that should have been disclosed because it was done with the shallower holes 46-48. The possibility that Noront management has done everything competently with full disclosure is the red flag that everything which has happened in the market during the past two days is a self-delusion fabricated by the market alone.

Just in case anybody missed that the omission of "nickel-copper sulphide" from the description of the deeper intervals was in fact an indirect material statement, Noront also went the extra step to discourage anybody from taking this hole too seriously. While admitting that this hole tripled the "known down dip extent of the Eagle One mineralization to more than 900 metres", Noront almost apologetically declared that the "current results provide no information regarding the true thickness of the newly discovered zones because the hole was designed to follow the mineralization down dip and determine vertical continuity". In other words, hole 09-49 is a down-dip or down-structure hole of the sort which is loathed by serious geologists and speculators, and beloved of pump and dumpers because of the spectacular but very misleading results they can deliver. To illustrate how easy it is for amateurs to fall into this trap, I note that on the Noront Stockhouse BullBoards somebody has posted an excerpt from one of my 2007 commentaries which articulates the theory then propounded by the Noront camp that Eagle One was the tentacle of an octopus rivaling Voisey's Bay. Sadly, the previous management of Noront headed by Richard Nemis never took its own imagination seriously, and rather than follow the Eagle One deposit deeper even though the initial discovery pinched out at a depth of 300 metres, chose instead to test other sulphide conductor targets and then got distracted by the Blackbird chromite discovery. So now we finally have a deep hole, and lo and behold, it is full of the sulphide visuals needed for one to believe in the Octopus, but the geological context is such that rational observers can only believe in a very long tentacle. Or, to deploy a different metaphor, Eagle One is a small Christmas tree light, and hole 09-49 crawls along the electrical cord that feeds it. Not surprisingly, in response to this news Noront's volume bumped into the 1.5-2.5 million share daily range, but by July 13 it had fizzled to a mere 376,785 shares closing at $0.63.

It wasn't as though the elevated Noront volume in the aftermath of the June 29 news release was driven just by a bunch of misguided enthusiasts on the Agoracom Noront glorification stock forum. Analyst Michael Gray of brokerage firm Genuity Capital Markets took note of hole 09-49 and published on July 2 a "Speculative Buy" for Noront at $0.62 which gave lip service to the existing Eagle One resource but pointed out the conceptual implications of hole 09-49 in terms of the "Conduit model bearing fruit". What Gray is referring to is the "string of pearls" theory which posits that Eagle One is just one of a series of enriched nickel-copper-PGE pods that developed somewhat later than the region's chromite horizons along the granodiorite-peridotite contact which in the McFaulds Lake region has been moved around both before and after the mineralizing event, which, of course, much complicates the detection of individual pearls. Unlike others who contend that a hole drilled through sulphides is useless for determining the proximity of sulphide bodies because the probe is trapped in a hall of mirrors, Gray is of the opinion that "both off-hole and in-hole geophysical target modelling can be conducted" on the basis of hole 09-49 which he rates a huge success. On that assumption it is natural to assume that since then Noront has conducted a downhole geophysical probe using hole 09-49, which may have revealed a wealth of new information about the extent of sulphide mineralization surrounding the 900 metre cord beneath the Eagle One light bulb down which the drill snaked. I have to admit that on Wednesday July 15 it was my conclusion that the explosion of trading volume in Noront was related to information from the field that a downhole geophysical survey had demonstrated that the sulphides in hole 09-49 were not simply tracking a very long but skinny tentacle, but had in fact intersected an octopus of sulphide mineralization, with the implication that future deep holes into this area would deliver lots of joy rather than the grief to which McFaulds Lake speculators had become accustomed. None of this would really qualify as material information, because the legal system bestows upon geophysical interpretations the same gravity it bestows on astrology readings. (ie "Anomalies are like assholes, everybody has one.") Assuming Michael Gray is correct that hole 09-49 is perfect for useful downhole geophysical probes, and that the geophysical interpretation that beneath Eagle One lurks Jabba the Hutt, the leakage of such "immaterial" information would explain the explosion of market activity on July 15.

However, and here I risk betraying that geophysics remains on my "must learn" list, others contend that Noront's hole 09-49 was a colossal failure because to be truly useful as a platform for downhole geophysical probes, it needs to be barren of sulphides so that the probe can "see" the variation in electromagnetic conductivity around the hole. In other words, Noront needs to drill the holes the management team was so effective at drilling unintentionally in late 2007 and early 2008. So if hole 09-49 was a big down-dip catastrophe that intersected all these sulphides when drilled near vertical to the northwest of the Eagle One deposit, the obvious next step is to move to the east or southeast of the Eagle One deposit near the border of the adjacent property owned by Fancamp Exploration Ltd (FNC-V: $0.66) where holes drilled to a maximum depth of 400 metres by both Noront on its side and Fancamp on its side of the border had intersected nothing of consequence. Well, judging by the market action in Noront on July 16, and the continued awakening of Fancamp, which jumped $0.33 to $0..66 on 3,415,500 shares on July 16, it appears that Noront has screwed up again in its quest to drill a deep barren hole!

At this point I should disclose that my call to Noront's Wes Hanson on July 16 was not returned, which is no surprise, because either Noront's new CEO is very busy answering questions posed by regulators and very important market players who are responsible for the 50,000 share market buy orders during the past two days, or he is smart enough to avoid somebody during a critical period who can ask of a straight-shooter a series of questions to which actual answers or "no comments" add up to highly useful information about what is really going on without violating any insider information disclosure rules. So here is what amounts to my educated guess about what is going on based on the ignorance, obfuscation, misinformation and hearsay I encountered while researching this phenomenal revival of market interest in Noront and some of the players in the McFaulds Lake area.

My guess is that Noront management realized that its geophysical downhole platform hole had clipped the edges of a string of pearls, much as hypothesized by Michael Gray, but, unlike speculated by Gray, did not find downhole geophysical probes particularly useful in "illuminating" where holes should be spotted to provide "true thickness" intervals of the pearls at depth. One option was to start deep-sea spear-fishing, but in light of how ineffective this had been with regard to Eagle One which should have likened a carp sun-bathing in a slough, Noront management rejected that approach. Instead, I surmise it decided to spot a new platform hole somewhere between Eagle One and the Fancamp border where not only earlier shallow holes had hit nothing, but Fancamp's shallow holes on its side of the border had also hit nothing beyond what keeps dreamers from fully waking up. The market action in Noront exploded on July 15 because some insider probably complained to a network hub that "we fucked up again trying to drill a barren platform hole", which was interpreted as meaning that sulphide mineralization below the Eagle One limits now extended laterally beyond the "down-dip" confines of hole 09-49 (very exciting and meaningful if those sulphides are "nickel-copper", which, of course, remains unstated at all levels, thus leaving the market open to a self-inflicted sucker trap.). This apparent evidence of a third dimension is what smart money is always on the lookout for, and whether this should qualify as material information, perhaps we should ask the analysts who participated in a site visit to Aurelian's Frutta del Norte property in 2006 while the stepouts to the discovery hole were being drilled.. Readers may remember that the initial concern with the Aurelian hole was that this blind hole had tagged a structure with locally elevated gold grades.

Whether Wednesday's Noront explosion was due to stories about a downhole geophysical probe going off the scale, or a second hole that revealed sulphides beyond the "conduit", we could not tell until Thursday when Fancamp's stock price started to move and I picked up rumours that a followup hole had been drilled somewhere between Eagle One and the Fancamp border, buttressed by stories that a new batch of core had been airlifted out of the Eagle One camp for rush assays. My discussion with Fancamp's Peter Smith about where exploration currently stood with his property, and about what he didn't really know was happening on Noront's side of the border, kept being interrupted by cell phone calls alerting him to a new high being hit by Fancamp's stock price. The upshot of my discussion with Smith was that during 2008 Fancamp missed the boat in raising some serious money to test the deeper conductors Smith saw below the 400 m limit of the 2008 drilling, which I attribute to the harmonies one might expect from a duet performed by Pat Sheridan and IBK, and that Fancamp was in no hurry to drill its side of the border now that Noront appeared to be in the process of demonstrating that a Jabba the Hutt style octopus is indeed squatting deep below Eagle One. I do not know if any of this is true, I am merely reporting to KBFO members the most coherent story I can unearth within the rumour mill that might explain why Noront has gone nuts during the past two days and why Fancamp is now strutting around the barnyard like a rooster who snoozed through his wakeup call.

All of this is relevant to KBFO members because in late 2007 and through the summer of 2008 I provided considerable coverage of both the Eagle One discovery and the implications for the McFaulds Lake area play which Nemis and his IBK pals self-servingly chose to brand as the "Ring of Fire" thanks to a strange obsession with Johnny Cash. I never recommended Noront because the Eagle One play quickly achieved a valuation ($800 million IPV) which according to my Rational Speculation Model offered very poor speculative value based on the fundamental limits that drill results were giving to the shape of the dream target, but I did strongly recommend neighbour Fancamp Exploration Ltd (FNC-V) as a Good Absolute Spec Value Buy at $1.85 on October 26, 2007 (based on a $50 million IPV) and confirmed it as such on August 18, 2008 at $1.22. Unfortunately Noront did little to expand the Eagle One into a world class discovery, choosing instead to settle for a 43-101 resource estimate of 440,000 tonnes of massive sulphides with a rock value of US $1,433/t for nickel, copper, platinum, palladium (and minor gold/silver) and 2,471,000 tonnes of $311/t disseminated sulphides for a total in situ value of $1.4 billion, much too low to be of interest in a remote region lacking infrastructure. Fancamp's stock price collapsed on September 10, 2008 after it reported that shallow drilling had hit nothing, but by then Noront was already in a free-fall, with the global market falling apart as Lehman and AIG failed. By early October Noront had become the focus of a proxy battled launched by Warren Irwin's Rossseau Asset Management fund which succeeded in ousting the Nemis management team. The new team has had a lengthy transition period, but now finally seems to be in charge of Noront's destiny.

Conclusion: If we were to assume nothing about the integrity of Noront's management, one would have to be suspicious that the information flow so far has been engineered to facilitate a pump and dump play based on big expectations about high grade nickel-copper-PGE intersections that suggest a blossoming of the original Eagle One discovery. If we assume that the new team has integrity, and has done almost everything within its means to prevent misunderstandings, then we are seeing Noront come into its own after spending more than a year wandering in a wilderness to which the former management exiled the company. With 161 million shares fully diluted Noront's Eagle One represents an IPV of $229 million at $1.42, which is much cheaper than the heyday in late 2007, but which to support we need concrete information about what is really going on in the vicinity of Eagle One. In contrast, Fancamp's IPV is only $22 million, a tenth that of Noront. To a large degree nothing has changed since my Spec Value Recommendations in October 2007 and August 2008, so theoretically Fancamp is an even better buy at $0.66 today. Bottom-line is that the Noront insiders hold all the cards, and the ones which have been laid on the table so far leave us outsiders at a distinct disadvantage. If I have correctly constructed the explanation for the market activity of the past couple days, then we will see some very exciting intersections for hole 09-49 during the next couple weeks, which the pundits will dismiss as misleading, followed by visuals and location of the rumoured second "platform hole", which, if positive, will unleash a brand new round of speculation with regard to full delineation of the Eagle One discovery, and, if this hole is indeed next door to Fancamp, it will drive Fancamp's stock price several times higher (to where it was when I first liked it). But this is all just an elaborate conjecture, and the best I can offer to Fancamp shareholders at this stage is, do not sell yet, for if this game is not a Noront pump and dump, Fancamp is hitched up for a much bigger ride than we experienced during the past couple days.