Kodiak Exploration : Resource base should finish 2010 up 1.8M ounces of gold

Thursday, December 16, 2010

There has been good news this year on all three fronts of Kodiak Exploration's strategy, which is to build shareholder wealth through a broad project portfolio in mining friendly jurisdictions through exploration, development and acquisition.

On the acquisition front, the good news has been Kodiak's definitive merger agreement with Golden Goose Resources, (GGR), whose principal asset is the Magino mine in Ontario, a past producing underground gold mine with 1.6M ounces of NI43-101 resources and the potential to host a significant open pit bulk-minable gold deposit.

Good news on the development front has included publication of a maiden 43-101 resource at the company's Hercules gold project; a maiden resource estimate for the Milestone project is also fairly imminent. On the exploration front there has been a string of positive gold exploration results from several of Kodiak's projects.

Highlights have included drill assays grading 16.6gpt over 4 metres at Milestone, 13.4gpt over 2.6 metres at Hercules and 9.31gpt over 24.9 metres at West Geraldton, while grab samples have been reported of up to 292gpt at Shields and 37.6gpt at Castlewood Lake together with a channel sample of 163gpt over 0.25m at Brenbar.

The bottom line is that the company, which had zero ounces of resources at the beginning of the year should finish the year with 1.8M ounces on the books, provided that 75% of Golden Goose shareholders approve the merger at the extraordinary general meeting on 13th December, as recommended unanimously by the GGR board. Kodiak's hope is that the finalising of the merger, in combination with the company's encouraging exploration results, its potential for further resource increases next year, its recently strengthened management team and board, and its healthy balance sheet, (with $12M cash at the end of October 2010), will set the stage for a major revaluation of the company, followed by future rapid share price growth as the portfolio develops and further acquisitions are made.


Kodiak's Project Portfolio

Kodiak's philosophy is to hold a large number of projects in mining friendly jurisdictions at varying stages of the development pipeline in order to give shareholders upside potential while simultaneously reducing risk.

The majority of Kodiak's projects currently lie in the Beardmore Geraldton greenstone belt in Ontario where the company has been accumulating land since 2007 and is now the largest landholder in the district. District consolidation is important, according to Brian Maher, Kodiak's President and recently appointed CEO, as "it is better to be able to explore based on geology rather than property boundaries". One of the lessons he says that he has learned in thirty years' experience in the mining industry has been that district consolidation has been the key building block in the success of many of the major mining companies, citing examples such as Codelco whose corporate predecessors consolidated the West Fissure in the Atacama desert in Chile, Newmont, (who discovered and consolidated the Carlin trend in Nevada), and Ashanti Gold (who mined more than 25M ounces of gold from the Obuasi district of Ghana and went on to become the first African company to list on Wall Street).

Besides the Beardmore Geraldton projects Kodiak owns a gold project in Manitoba and uranium projects in the Athabasca Basin, Saskatchewan and Quebec. After the GGR meeting Kodiak will also own the Magino Mine project near Wawa, Ontario.


Magino Mine, Ontario

Kodiak announced its definitive merger agreement with GGR in August 2010. Once the agreement is approved, Magino will be the most advanced project in Kodiak's portfolio. The 19 square kilometre project lies 40km north east of Wawa, Ontario and 14km south east of the township of Dubreuilville. It is accessible along a 14km all-weather gravel road from Highway 519, rail sidings are 14km by gravel road and a 44kV power line services the project.

The project has been explored sporadically since 1918. It was mined in the 1930s, (though success was hampered by poor mining and processing methods and later by difficulties in obtaining finance, labour and materials in the war/post-war period), and again from 1988-1992. Production over those four years totalled 105,000 ounces of gold at an average grade of 5.24gpt. Golden Goose acquired the property in 1996 and conducted further exploration publishing an NI43-101 technical report and resource estimate of 1.6M ounces in May 2009.

Exploration has since continued apace. To date more than a thousand holes have been drilled and six independent resource estimates have been published (five non 43-101 compliant), so, according to Brian Maher, the amount, the grade and distribution of gold is well known. The property is characterised by high grade gold veins which are enveloped by thick zones of lower grade gold mineralisation. Kodiak believes that the low grade envelope shows strong continuity and large tonnage potential and thus that the project already has excellent surface bulk mining potential. Since it remains open along strike and at depth, tit also considers that there is great potential to extend the resource. Historic metallurgical testing has indicated recovery of 95% in a conventional mill circuit.

Kodiak's plan is to conduct a preliminary economic assessment (PEA) by February 2011 to establish the economic viability of open pit mining. The study will also include a new resource estimate based on using existing drill assays to assess the open pit potential of the project. If the economics prove favourable, and Maher says that he is optimistic about a positive result, the company will then target publishing a pre-feasibility study which will incorporate drilling results and a new resource estimate by April/May 2011. A fully bankable feasibility study could then be prepared for the first quarter of 2012 with the mine in production by 2014 if all goes well. Kodiak's target initially is to produce 100,000 ounces a year.


The Beardmore-Geraldton Projects, Ontario including Milestone and Hercules

Kodiak's 44 properties total some 2,000 square kilometres in the Beardmore-Geraldton greenstone belt where it is the dominant land-holder in the district. The properties, which lie within an area which of about 150 by 40km are a mix of 100%-owned, claimed and option agreements.

The belt is an Archean greenstone belt located to the northeast of Thunder Bay, Ontario. It lies roughly midway between the highly prolific Red Lake gold camp (which has reserves/resources /former production of about 30M ounces of gold) and Timmins Gold Camp (70M ounces). There is excellent local infrastructure with national highways, railroads, power, water, aggregates, two small airports and a labour supply.

Gold was first discovered in the region in 1925, and between 1934 and 1968 some 4.1M ounces of gold was produced from 14 mines at an average grade of 9.33g/tonne; the camp was considered one of the top five in Canada. However the mines were all closed by 1970 principally because the then-known low-cost bulk tonnage ore had been mined out, holdings were fragmented, and the mines became uneconomic at the prevailing gold standard price of $35/ounce.

Like several other historic camps in Canada Beardmore-Geraldton has recently been undergoing a renaissance as companies have come to realise the excellent potential for applying modern exploration techniques to known gold districts where there are still attractive resources in the ground. Kodiak was one of the first off the block in Beardmore-Geraldton enabling it to pick up the largest land package. However there are now many companies actively exploring the belt, (though no mines or mills in operation as yet), and already at least 2.7M ounces of gold has already been defined in new resources including 1.7M ounces by Premier Gold at the Hard Rock project, 0.85M ounces by Goldstone Resources' at the Brookbank project and Kodiak's 200,000+ ounces at Hercules.

Indeed Kodiak's first discovery in the district was the aptly-named Golden Mile vein at the Hercules project. The prospecting team noticed visible gold in an outcrop and subsequent exploration has revealed over 5km of gold bearing structures at surface in a system of veins up to 11 metres wide. The best drill intercept from over 460 drill holes at the project has been 515.98 gpt gold over 2.5 metres. Kodiak has produced an excellent video which flies over the Golden mile and provides a lot of information on results. Metallurgical testing on bulk samples has indicated very high recovery rates of 99% and has indicated that ore will be amenable to low cost conventional milling techniques.

Kodiak published its first resource estimate for the project in May 2010. Since the mineralised zone includes some areas of very high grades (more than 100g/t) these can have a significant impact on grades so the resource estimates are presented both on an uncapped basis (which includes the very high grade areas and thus represents, perhaps, an optimistic estimate) and on a capped basis (which excludes them and thus represents a conservative estimate). The true grade, arguably, is likely to lie between the two.

The company is now conducting additional drilling in the area with a view to publishing an updated resource in 2011.
Although Hercules is the most advanced of the Beardmore Geraldton projects Kodiak is also excited about its Milestone project. Milestone is a large scale low grade disseminated gold system with mineralisation near surface which may be exploitable by bulk-mining methods. To date Kodiak have drilled a total of 23,000 metres in 80 holes over a strike length of 2,500 metres intercepting average widths of about 30 metres to a depth of at least 300 metres. The system is still open in all directions; recent results suggest that the potential for further expansion is good. A highlight from the latest results included an intercept of 35 metres grading 2.21gpt gold including 4.0 metres grading 16.58gpt gold

Kodiak's plan is to publish a resource estimate in 2011 though the exact timing and scope of the estimate will be determined by the findings of the current 3,500 metre programme. The company's hope is that the project will prove to be large, and of a similar scale and geology to Magino

While Magino, Milestone and Hercules are now the major focus for Kodiak the company is still progressing work and publishing encouraging results (as summarised earlier) on several other projects in the belt including Brenbar, West Geraldton, Kaby Lake, Sturgeon Bridge and East Leitch.

Kodiak has a strong CSR policy and good relationships both with the local communities in the Beardmore Geraldton district and with the local First Nations band council, Animbiigoo Zaagi'igan Anishinaabek. Eighty per cent of Kodiak's non-technical workforce is from the local First Nations band; Kodiak have developed several training programs for workforce development. Mining companies have generally been welcomed in the district where the economy has been hit my recent closures in the timber sector.


Kodiak's Uranium Projects: West Millennium, Saskatchewan and Otish Mountains, Quebec

Kodiak owns a number of uranium projects at Otish Mountains, Quebec and West Millennium in the Athabasca Basin of Saskatchewan. The Basin is the largest producer of uranium in the world, accounting for about 20% of world production and home to the world's largest uranium mine. It is characterised by unusually high grade deposits with grades as high as 50% U3O8.

Kodiak has been active in exploring its uranium projects but following recent successes with its gold projects the company is now likely to be looking for new ways to progress its uranium assets without direct cash investment from Kodiak. Since the uranium price has recovered some 50% in the last 4 months any deal considered will have to reflect the new marketplace. Possible options might include a JV or a project for equity swap which would allow Kodiak's shareholders to participate in potential exploration upside but would eliminate the financial risk.

Future Plans

Kodiak has strengthened both its Board of Directors and Management team over the last 12-18 months appointing economic geologist, Brian Maher, as President and CEO, Tony Wood as CFO, Darren Lindsay as VP-Exploration, and Tom Barber and George Salamis to the Board. Together the new appointees have brought considerable experience in exploration, economic geology, mine development and finance to the table to complement existing skills and the new team has already demonstrated success in exploration, development and acquisition.

Kodiak's immediate plans are to complete the GGR acquisition and to progress the preliminary economic assessment, pre-feasibility and bankable feasibility studies for Magino, to continue the exploration programs to define and expand resources at Milestone and Hercules, to progress other early-stage projects to identify the next project for resource-building, and to track the market for suitable acquisitions which could enable Kodiak to leap-frog the development pipeline.

Kodiak raised $13.8M in a fund-raising last December. At the end of October 2010 it had $12M in cash. The burn rate, with four drill rigs turning, is currently around $1.5M per month. There is thus no immediate requirement to return to the market, and Maher's hope is that the closure of the GGR acquisition and the company's resources of 1.8M ounces will lead to a rerating of the merged company by the market. Kodiak will then be in a position to seek further financing at a more favourable rate. The shares currently have strong institutional support, with about 20% held by institutions, 20% held by Management and the remaining 60% by retail investors. They have a high level of liquidity with turnover averaging some 250,000 – 300,000 shares per day.

Kodiak's current market capitalisation at today's share price of 32 cents is just north of C$40M on a fully diluted basis, but C$64M on a pro forma basis post completion of the GGR acquisition.